Former tennis pro Peter Imhof hasn't lost any of his desire to win, but he now competes in a different game where the stakes are high.
He's a doubles player in Canadian small-cap equities, teamed up at Toronto-based Sprott Asset Management Inc. with his more experienced and better-known colleague, director of small-cap investments Allan Jacobs. The duo moved together down the street to Sprott on Aug. 1 from Sceptre Investment Counsel Ltd., where they worked together for six years.
"I love the environment," says Imhof of his new shop. "It's collegial but competitive where you're just trying to get absolute returns, which is kind of what our style has been."
As an investment strategist, Imhof shares the responsibility of managing the fast growingSprott Small Cap Equity, which was launched on Aug. 23. They are also in charge of running Sprott's newly acquired Sprott Small Cap Hedge, formerly Sceptre Small Cap Opportunities, launched by Sceptre on Jan. 31
On the strength of the managers' track record at Sceptre, Sprott Small Cap Equity has attracted more than $140 million in assets in only a couple of months. But it's still a much smaller pool of assets than the $1.6 billion that Imhof and Jacobs left behind at their former employer.
"We will be much more nimble," says Imhof. For example, they will now be able to take advantage of some smaller undervalued companies that are less than $100 million in market capitalization.
Seeking absolute returns while preserving capital is the prime objective of Jacobs and Imhof, both of whom have invested a large portion of their net worth alongside their unitholders.
Concentrating on "very much a GARP" approach -- seeking growth at a reasonable price -- the duo focuses on high-quality, profitable companies with very capable management and strong balance sheets. They meet with the management team of every company that ends up in the portfolios.
Montreal-based T-shirt manufacturer Gildan Activewear, Inc. ( GIL/TSX) is a perfect example of a GARP approach, "and one of the great Canadian success stories," Imhof says. He cites Gildan's rapid earning growth, expected to exceed 40% over the next year, and its economies of scale.
The managers expect to hold approximately 95% of the assets of Sprott Small Cap Equity in Canadian securities, concentrated in 40 to 60 names. Imhof says he and Jacobs don't want to "diworsify" by having too many holdings. They do intend to be well diversified by industry sector.
Portfolio turnover tends to be moderate. The two managers like to hold their winners but will trim them if they get up to a 7% position in the overall portfolio.
Historically, "our turnover would have been about 35%," says Imhof, and many of the buys and sells resulted from takeovers of companies that they owned. Imhof says the Sprott fund will probably keep around 10% in cash on the sidelines to take advantage of opportunities or market corrections.
Imhof, 36, brings an unconventional background to his collaboration with the 48-year-old Jacobs. After graduating from Algonquin College in Ottawa in 1994 in business administration, he toured the tennis circuit, combining playing and teaching. During that period, he pursued his interest in the stock markets by taking industry courses and meeting with fund managers and company management teams.
In early 1998, Imhof approached Jacobs at a conference in Toronto and expressed his interest in the investment industry and in joining Sceptre. Jacobs wasn't keen at first, but then Imhof surprised him with details about the companies in his fund holdings.
"So they brought me on board," says Imhof, who joined the firm in March 1998. Initially, he worked on quantitative and risk analysis, helping Jacobs "a little bit." Then, after some management changes around May 2001, Jacobs brought Imhof into the small cap-area to work with him on the equity fund.
"Allan and I both love what we do and we're both very competitive," says Imhof, "so we're always trying to find better stocks than the other one -- but in a very collegial way." During the time that Imhof and Jacobs have worked together, Jacobs was honoured as Morningstar Canada's 2006 Manager of the Year.
Imhof says that during the past six years, they have improved their sell-discipline skills. They have avoided "torpedoes" by doing their due diligence initially and by "being quick to take money off the table," he says.
Imhof disputes the notion that small-caps are unduly risky. "A lot of times you will hear that small caps are speculative," he says. That would be true "if you bought some stock on the venture exchange that didn't have any earnings or revenues and went down to zero." But, Imhof adds emphatically: "Those aren't the type of companies we buy."
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