Quebec-centric funds: Vive la différence

Politics and nationalistic pride aside, the Quebec-centric funds have proven to have considerable investment merits over their more than 15 years of performance history. To understand why, consider the Quebec economy itself, which is somewhat of an outlier in the Canadian landscape.

These funds reflect la différence, with sector weightings that are generally very different from those of the S&P/TSX Composite Index. They tend to be underweight in the financial-services and resources stocks that dominate the broad Canadian equity market.

Instead, the Quebec funds are likely to be more heavily weighted in the industrials, consumer staples and consumer discretionary sectors. As a whole, the universe of Quebec-based stocks "resembles more the S&P 500 Index, but with less health care and technology," says Christine Décarie, senior vice-president and portfolio manager of the $380-million Investors Quebec Enterprise.

The trio of Quebec funds each has the top 5-star Morningstar Rating for risk-adjusted performance in their categories: Desjardins Quebec Balanced in the Canadian Neutral Balanced category, Investors Quebec Enterprise in Canadian Equity, and NBI Quebec Growth in Canadian Small/Mid Cap Equity. Despite their outstanding track records, sales of these funds are largely confined to Quebec. Only 5% of the Desjardins fund is held by non-Quebecers. The Investors fund has a larger share at 16%.

"I have a bias toward small-caps, even micro-caps," says NBI Quebec Growth's manager Lecavalier, who received his training at the time of the REA program. That's where he learned "to evaluate companies when they are smaller and to follow them on a daily basis until they become tomorrow's stars. It allowed me to buy, earlier than anybody else, companies like Stella Jones Inc. (SJ) and Tecsys Inc. (TCS)."

Lecavalier's mandate is strictly Quebec-focused. He invests only in companies whose head offices are located in the province and that have a large part of their activity there. Of course, many of these Quebec-based companies now conduct their business well beyond the province's borders. Among the success stories are the convenience-store operator Alimentation Couche-Tard Inc. (ATD.B), aerospace manufacturer Heroux-Devtek Inc. (HRX) and the engineering and construction company  SNC-Lavalin Group Inc. (SNC).

Desjardins Quebec Balanced is just as Quebec-centric, except that about 40% of its assets are in bonds, of which 87% are issued by the provincial government. Their average duration is 6.5 years.

Quebec government bonds have benefited from investors' growing confidence in the province's debt management, and its political stability. "For a long time, they suffered from a large negative spread compared to Ontario bonds, but that spread has now shrunk to four or five basis points, thanks to Quebec's tighter management of its debt," explains Alain Rhéaume, portfolio manager of the fixed-income portion of the fund. "Furthermore, the fear of political separation doesn't hold sway any more. Institutional investors like that kind of story."

Investors Quebec Enterprise isn't a pure Quebec play. It focuses on companies that have their head offices in Quebec and a large part of their assets or revenues in Quebec. But the fund also holds  Royal Bank of Canada (RY) and  Bank of Montreal (BMO), simply because their head offices are formally in Quebec, even though the key administrative offices are in Toronto and by far most of their businesses are outside Quebec. "I also reach outside Quebec to own sectors that have little presence in the province, which explains the presence of  Suncor Energy Inc. (SU)," says Décarie. In all, the "pure" Quebec stocks represent about 75% of the portfolio.

Some companies, notably Alimentation Couche-Tard and SNC-Lavalin, are held in all three funds. And for good reason. For example, SNC-Lavalin has made a solid comeback since its pre-2015 legal problems. "The new president Neil Bruce is taking care of the business now, not of legal matters," says Décarie. "The company is consolidating recent acquisitions in the U.S. and everything is back on the growth path."

A less prominent stock, but one that has produced strong returns, is Dollarama Inc. (DOL). The retailer is "on a roll in the dollar-store sector that is growing everywhere," says Desjardins' Felx. The company has a market capitalization of $17 billion, with revenues of $3.2 billion and net income of $519.5 million. At a recent $157, the stock price is nearly five times higher than five years ago. "Its contribution to the total return of the portfolio is very strong," Felx adds.

Another standout Quebec company is MTY Food Group Inc. (MTY), a restaurant consolidator that operates brands such as Sushi Shop and Thai Express. "The company has very predictable revenues, few capital expenses and a very diversified offering," says Lecavalier. "When we bought the stock 15 years ago for $1, the company had only five banners. Now, it has about 75, and the stock stands at $50, he recalls. That's the advantage of buying microcaps."