April 2016 fund performance

Canadian small-cap funds miss out on some rallying materials and energy stocks in the month of April.

Jeffrey Bunce, CFA 16 May, 2016 | 5:00PM
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Jeffrey Bunce: This month, we're looking at the performance of the Canadian small and mid-cap space. The TSX Small Cap Index was up 12.4% in April and up over 22% year-to-date. Compare this to the larger-cap TSX Composite, which was up 3.7% in April and up over 8% year-to-date.

The materials and energy sectors were the major contributors to returns in the small-cap space in the month of April. Materials were up over 25%, while energy was up 18%. Both of these sectors represent a large stake of the benchmark, representing close to 50%, and so they were the major contributors to the returns.

Broadly speaking, many of the managers in the small-cap space screen out many of the junior oil and gas and metal and mining companies. These companies are often in the early stages of development and have very little revenue or production to speak of. Given the unclear long-term visibility of these companies, many managers choose to simply look elsewhere, instead focusing on companies that have current revenue, longer-term track records and stable businesses.

Having said this, it shouldn't be surprising that many of the managers in the small-cap space underperformed the TSX Small Cap benchmark. In fact, none of them beat the benchmark for the month of April. The category average was quite a bit lower than the benchmark at a 4.6% return.

Franklin Bissett Small Cap is a Neutral-rated fund, but it was one of the top performers in April and year-to-date. It was up 9.6% in April and 12.6% year-to-date. The strong returns for this strategy were driven mostly from the manager's overweight in the energy sector. The manager held many energy service companies, such as Trinidad Drilling and Trican Well Service, that rallied significantly in April.

A fund that we have higher conviction in is the Beutel Goodman Small Cap. It returned 6.6% for the month of April and is a Silver-rated fund. It underperformed the benchmark mainly because it didn't hold many of the gold and mining stocks that rallied significantly, but of the two gold stocks that it did hold, they both were up quite significantly. Alamos Gold was up 32% while Asanko Gold was up 47%. [They also have] a 6.5% weight in Equitable Group, which rallied 18% in the month of April; [that] also helped drive returns.

Over the past 10 years, managers that we have high conviction in, such as Mawer New Canada, Beutel Goodman Small Cap and NEI Ethical Special Equity, are all top performers and have all beaten the TSX Small Cap by in excess of 5% annualized. We can expect these managers to lag when commodities rally, such as what's happened in April. But going forward, by focusing on companies that have strong businesses that generate lots of free cash flow, they expect to be able to deliver strong returns for investors.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alamos Gold Inc Class A21.43 CAD-1.47
EQB Inc88.10 CAD-1.03
Galiano Gold Inc2.28 CAD-2.56
Trican Well Service Ltd4.44 CAD-2.20

About Author

Jeffrey Bunce, CFA

Jeffrey Bunce, CFA  Jeffrey Bunce, CFA, is a senior investment analyst for Morningstar’s Investment Management group.

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