Heather Ritchie, manager ofLegg Mason Canadian Growth Equity, is an intrepid world traveller. Experiencing the culture, customs and economic realities of places such as China, Japan and South America have given her helpful insights that she applies to stock picking in her small-cap fund.
"Travel has helped me to understand what other countries are going through and to gain insight into global political and economic trends," says Ritchie, senior portfolio manager at Legg Mason Canada Inc. in Toronto. "You can see things coming, like the drop in the U.S. dollar, and can analyze the impact on Canadian companies. If you don't graft on the macro factors that can affect companies, your unitholders will suffer." Ritchie, who has been the sole manager of the $36.6-million Legg Mason Canadian Growth Equity since July 2002, concentrates on small- and mid-sized companies with outstanding float capitalizations of less than $1 billion. She says there's no floor on size except her need to maintain liquidity, and that some of the "real gems" have a market cap of less than $100 million.
"With small caps you can see entrepreneurial talent at work," says Ritchie, who is also co-manager ofLegg Mason Canadian Sector Equity. "It's exciting to watch a company being built step by step, from the incubation of an idea, through to research and development, market penetration and commercial success."
Ritchie's returns have been healthy during her short tenure on Legg Mason Canadian Growth Equity. In 2003, the fund gained 47.9%, well ahead of the category's median gain of 24% and also exceeding the BMO Nesbitt Burns Canadian Small Cap Index's gain of 42.7%. Originally, her fund was called Perigee Canadian Aggressive Growth Equity, until Baltimore-based Legg Mason Inc changed the name in October 2003. It bought Perigee Investment Counsel Inc. in May 2000, and changed Perigee's name to Legg Mason Canada last October.
With small caps, Ritchie says it is vitally important to monitor the ability of company managers to adapt as their business grows. "Just as management can make a company, so can they destroy it through bad decision-making and an inability to bring in the talent required for the next phase," she says. "At the development stage, a company needs techies and engineers. But it may have trouble when it comes to breaking through the barriers to distributing its product. That's when management needs to bring in good marketing talent, and to listen to those people."
Ritchie meticulously dissects financial statements and the fine print contained in the notes, to see if management is attempting to "gloss over" problems, and whether they are "generous with information or insular." If management gets defensive when she asks probing questions, that "raises an immediate red flag."
Ritchie acquired her analytical skills through varied experience in the investment business, including stints in research and derivatives trading. She graduated from Queen's University with a bachelor's degree in economics in 1977, followed by a master's degree from the University of Western Ontario in 1978.
After working for a year as an analyst at Alcan Aluminium Ltd.'s treasury office in Montreal, she moved to Confederation Life as an energy analyst in Toronto. Subsequently, for several years she managed the global-interest-rate swap book for the Bank of Nova Scotia.
In 1989, she moved to the former Walwyn Stodgell Cochran Murray Ltd. as a senior analyst in communications and media. She joined Perigee in 1998 as part of the Canadian equity team, before she took over what is now Legg Mason Canadian Growth Equity in mid-2002.
Ritchie keeps her portfolio to about 40 names, and will also concentrate heavily in certain sectors if she likes the prospects. At the end of 2003, she held 40% of the fund's assets in materials, including gold and base metals.
She is not afraid to invest heavily in a company or sector when she likes what she sees, and will go as high as the 10% legal limit in especially attractive situations. "If you invest in a good quality company with sound business plans and a management team that can execute them, you can get the doubles and triples in stock price that really boost fund returns," she says.
While Ritchie needs to hang on to winners to get the doubles and triples, she sells quickly when prospects dim. In 2003, her turnover was more than 100%. "I don't mind high turnover," she says. "I'm quick to recognize when fundamentals deteriorate, management credibility is no longer there or something else has gone wrong. It's important not to let a small loss build into a big loss. You can always get back in if things turn around, and there's always another street car."
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