Charles Oliver, vice-president and portfolio manager at AGF Funds Inc., appreciates the power of small, budding companies to fuel portfolio returns. He deliberately allocates a sizable portion of assets to the small end of the spectrum withinAGF Canadian Resources, which he co-manages with AGF veteran and chief investment officer Robert Farquharson, along withAGF Precious Metals andAGF Global Resources Class.
Oliver likens buying undiscovered, unloved small caps to purchasing a house in a weak market. When there's not much interest and nobody knows about a company, conditions favour the buyer. "When you get into the small-cap arena there is potential for significant upward returns, not just a double, we've had 10 to 20 baggers," says Oliver, who was also appointed sole manager ofAGF Canadian Small Cap two months ago. "However, some of these companies don't live up to expectations, and that's why we spread the risk across a lot of names."
Oliver holds up to 150 stocks in the $196-million AGF Canadian Resources portfolio, which is typically divided equally among large, medium and small-cap holdings. His top 10 holdings are large-cap stocks that are weighted more heavily than the riskier small caps.
On an individual basis, bigger companies would account for 2.5% to 3% of fund assets, smaller companies would be less, and initial positions in micro-cap companies would be about 0.2% to 0.3% of assets.
"We might have 10 small stocks that add up to 2% of the fund," says Oliver. "We expect two will have significant upside, two won't succeed, and a bunch in the middle will move along and hopefully create a spark. As the stock price rises and a position gets larger, we'll typically pull back to reduce stock-specific risk. That being said, if we still believe the stock is cheap, we'll wait for the value we perceive to be recognized by the market."
AGF Canadian Resource has a one-year return of 47.6% to April 30, higher than the median return of 41.1% for the Natural Resources category. The fund, which was founded in 1960, shows a five-year gain of 12.7%, matching the category's median return.
Oliver has been a co-manager of the fund since December 2002, and was previously involved as an analyst for five years, working closely with his mentor Farquharson. Oliver originally trained as a geologist, graduating in 1987 with a B.Sc. from the University of Western Ontario.
After a couple of summers spent as a student doing mining exploration field work in northern Ontario and Quebec, his interest shifted to the financial side, and he joined the trading desk at Midland Walwyn Inc. after graduation.
"I always liked the idea of going into the bush and searching for the next great deposit," he says. "But the reality was that I didn't like mosquitoes, or hiking around in two layers of clothing and Wellington boots in the heat. I could also see that living in the middle of nowhere was going to be difficult for relationships and family life."
Oliver later switched to Midland Walwyn's retail operations as an advisor, but decided he preferred analysis to sales. He enrolled in the chartered financial analyst program and joined AGF's equity team as in 1997.
Oliver is a bottom-up investor who evaluates companies on the basis of traditional yardsticks like price-to-assets and price-to-cash flow. He also keeps an eye on commodities such as gold, base metals and energy, and will buy more of a company when the macro-economic factors are favourable.
He takes great pains to find out about the people at the top of potential holdings. He likes to see management owning a significant share of the company, keeping their interests aligned with those of other shareholders. Once he finds a solid team and property, he tends to hold on to companies. His annual turnover is low, typically running at less than 20%.
"We want to see capability, knowledge and some sort of advantage that will help the company grow," he says. "It's important to understand what motivates management. I listen carefully when people tell me their hopes, dreams and aspirations."
Oliver maintains a network of contacts, and finds it can be revealing to call up someone who knew somebody or worked on a particular property in the past. "A simple phone call can provide invaluable information," he says. "I like to make sure that what somebody is telling me matches with their history. It's good to talk to people with both negative and positive views, as you can find out about the downside and what the difficulties might be."
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