During what was the worst year for small-cap stocks in four decades, Alex Sasso tried to ease the pain for his investors. He raised cash levels inNorrep 
to relatively high levels, sold companies whose fundamentals were deteriorating, and shifted into more defensive names.
Despite all these efforts, the fund took still took a significant hit. It lost 51% in 2008, compared with the 53.3% loss of the benchmark BMO Small Cap Weighted Equity Only Index.
"Our investment methodology is to try to add alpha [excess returns] with under-followed and under-loved stocks," says lead manager Sasso, 41, who works in the Toronto office of Hesperian Capital Management Ltd. and also recently became CEO of the Calgary-based company.
"That is great for nine-tenths of the business cycle. But when you're going into a recession, it's those companies that tend to get hurt more. That's what we found. It was by far the worst year in my career," says Sasso. He added that the fund also suffered because he avoided gold stocks, which outperformed most other sectors.
Sasso stuck to his methodology and was rewarded this spring. The 5-star rated fund returned 22.7% for the first six months of this year, five percentage points ahead of the median fund in the Canadian Small/Mid Cap Equity category. That put the $71.2-million fund in the top quartile, which is consistent with its long-term performance. Over the last 10 years, the fund returned an annualized 16.4%, compared with 5.6% for the median fund.
One of the new names that contributed to performance was Aecon Group Inc. ( ARE/TSX). Shares in the engineering and road construction firm were trading at $5.70 last October when Sasso made his purchase for the fund. "It had a backlog of $1.1 billion in orders, so we knew that even if it signed no new business that it would ride through the storm," recalls Sasso, noting that the company had a return on equity of over 15%. "It's the 'go-to' infrastructure play and very high quality company."
Sasso trimmed the position when the stock ran up to $11, and then added on weakness in March. Sasso believes it could hit $20 within 12 to 24 months. "Within the next 12 months, the market will start to feel more comfortable with Aecon and ascribe a higher price-earnings multiple," he says. "We should see earnings growth and multiple expansion."
A native of Windsor, Ont., Sasso has been in the investment business since 1990, when he began as an analyst at Altamira Management Ltd. "I was trained by some of the best in the business," says Sasso, who graduated from the University of Windsor with a bachelor of commerce in economics and finance. He worked with managers such as Frank Mersch, Normand Lamarche and Sue Coleman.
Sasso developed his expertise in small-caps while working in from 1997 to 2000 with Coleman, who managedAltamira Special Growth. He assumed the fund when Coleman left in 2000, and also managed Altamira's small-cap pension assets. "It's something that I always wanted to do. If you want to generate alpha, your best bet is in small-caps because they are the most inefficiently priced."
In August 2004, Sasso was recruited by Hesperian's founder and chairman Randy Oliver, when the firm had $140 million in assets. Since then, it has grown to about $400 million.
In late May, Sasso was promoted from vice-president to CEO, as Oliver stepped aside to be chief investment officer. "It's a seamless transition. Much of Randy's core investment philosophy is similar to my own."
Besides running Norrep I, Sasso also manages the $124.9-millionNorrep II , a 3-star rated fund that has identical names but operates within a corporate structure, and the $20.1-millionNorrep Income Growth Class which is focused on income trusts.
Sasso runs concentrated portfolios of about 40 names, and limits positions to about 8%. Turnover for Norrep has been moderate, at 37% in 2008.
Using a quantitative system, Sasso develops a shopping list of more than 100 companies that are then subject to intensive fundamental analysis. This ranges from management discussions to analysis of balance sheets and where the company ranks within its peer group.
Looking ahead, Sasso is confident that small caps will rebound sharply, as they have in the past. "Since 1970, the average snap-back was 35.7%, 12 months after a recession," says Sasso, noting that the larger the decline, the larger the rebound. "What the snap-back will be like is a big question. But I am really bullish about small caps for the next 12 months."
That's why he continues to favour names such as Stella-Jones Inc. ( SJ/TSX). The Montreal-based maker of pressure-treated railway ties and utility poles is one of the dominant players in a niche segment.
Stella-Jones took a beating in 2008, as revenues and earnings slowed. Although it bottomed at $12.50 last March the stock has since almost doubled. "It's still cheap," says Sasso, who believes that as earnings improve the stock could reach the mid-$30s within 12 months.
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