With nearly $900 million under management in Canadian small-cap equities for Mawer Investment Management Ltd. in retail and institutional accounts, Martin Ferguson believes there will be a time when his firm will have to just say no to accepting new small-cap assets.
That's already the case forMawer New Canada 
, a Morningstar Fund Analyst Pick that Ferguson has managed for nearly 13 years. The $129-million fund has been capped since January 2005.
For individual retail investors, access to Ferguson's small-cap expertise can also be obtained through the $119-millionBMO Guardian Enterprise Mutual andBMO Guardian Enterprise Classic , which he also manages. The BMO Guardian mandate is essentially identical to that of Mawer New Canada, though the BMO Guardian management-expense ratios are much higher than Mawer New Canada's 1.42%.
While there are currently no constraints to bringing in new money to the BMO Guardian fund, "there will be a point in time where there will be limits, but we're not there yet," says Ferguson. "So at this point, we've probably got at least two years of hard running before we even look at capping the BMO Guardian fund."
Ferguson, a director and portfolio manager at Calgary-based Mawer, has managed Mawer New Canada since December 1996 and BMO Guardian Enterprise since September 2004. He is responsible for $885 million in total assets under management.
Ferguson has outpaced his Canadian Small/Mid Cap Equity peer group through careful selection of what he calls "blue-chip" small-capitalization companies, and disciplined risk management. His funds characteristically hold 40 to 60 stocks, and are fully invested.
"We want that margin of safety, so we're looking for companies that already have what we call a complete business model," says Ferguson. He favours companies that have "already proven that they can create revenue and bring it to the bottom line, and have a competitive advantage."
To start the investment process, Ferguson scours the universe of the 350 to 400 Canadian companies that have market capitalizations between $50 million and $500 million. Mawer's valuation models include a discounted cash flow model that spans 15 years. The firm also uses Monte Carlo simulations to test valuation assumptions and gauge future uncertainties.
Once a stock is bought for the fund, its capitalization limit is characteristically that of the BMO Small Cap Index. Currently, the upper market-cap limit for that index is about $1.3 billion.
Ferguson is a buy-and-hold investor. "My highest portfolio turnover was in the year 2000," he says. "It was 35%, and the lowest it has been is probably in the low teens, around 13%."
Ferguson's risk controls include limiting individual stock holdings and industry-sector weights to 6% and 20%, respectively. He will also consider selling a holding if valuations get too high, if there are changes in fundamentals such as debt loads, or if a company loses its competitive advantage.
Ferguson will make exceptions to this rule, notably his long-time holding in Crescent Point Energy Corp. ( CPG/TSX). Although Crescent Point has grown to $5 billion in market cap, Ferguson has trimmed but not eliminated his position. "The company has over a decade worth of drilling opportunities, and they're just continuing to go from strength to strength," he says.
One of the largest holdings in the fund is Constellation Software Inc. ( CSU/TSX), which Ferguson praises for its "tremendous business model" and excellent management team. The company provides software to more than 20,000 companies and government organizations, and has a high success rate in retaining clients. "So I have stability of cash flows, longevity and long-life assets," Ferguson says.
Constellation Software exemplifies the opportunities that Ferguson is seeing in the technology sector. "I'm index-agnostic," he says, "we're at an all-time high and the index is at an all-time low as far as the tech weighting. We're finding some great values and the companies that I have are companies that have some technology product or service that is critical to the company or their clients."
Ferguson, 49, has elements of being both a value and a growth investor. He describes himself as fitting in the middle of the investment triangle of the investing icons Warren Buffett, Phil Fisher and Benjamin Graham.
After graduating from the University of Alberta in 1982, Ferguson joined the Alberta Treasury's investment division. He then briefly worked at Principal Group of Companies, a financial conglomerate that collapsed in 1987. Then he was welcomed back at Alberta Treasury, rising to assistant portfolio manager on the Canadian investment side, until joining Mawer in 1996.
Ferguson credits his track record to "one of the best teams in Canada," with 14 people, plus himself, in the research department. Because the quality of company management is considered paramount, the Mawer team meets one-on-one with probably two to three companies a week.
Team-building is an ongoing priority at Mawer, where Ferguson and his colleagues have just returned from an annual retreat. He says the focus this year was on personal and team visions over the next 10 years, "in order to move us to our vision of being a high-performing research team and global franchise, based on excellence."
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