Richard Fortin makes no apologies for the recent underperformance of the $775-million Franklin Bissett Small Cap Class and the $285-million Franklin Bissett Microcap Class.
"The funds have generated decent returns on a five-year basis, when you look at them on a risk-adjusted basis," says Fortin, vice-president at Calgary-based Franklin Bissett Investment Management. "But they lagged this year due to unfavourable sector allocation, stock selection and carrying an above-average cash position in a rising market."
In part, the funds were hurt by an underweight materials exposure and missed out on the surge in gold equities. "We're stock-pickers and follow a disciplined methodology when looking at businesses," says Fortin. "At the end of the day, the materials sector is lower quality in nature, in terms of the attributes we look for. The expected returns do not compensate us for the risks that we're assuming."
Fortin argues that many resource stocks do not have meaningful cash flows and rely on capital markets to finance their operations. "We buy businesses with proven track records of generating growth in per-share earnings and that earn their cost of capital. We had a difficult time finding these kinds of businesses in the materials space."
For the 12 months ended Sept. 30, the 3-star rated Franklin Bissett Small Cap returned 13.9%, versus 17.8% for the median fund in the Canadian Small/Mid Cap Equity category. Similarly, the 4-star rated Franklin Bissett Microcap lagged the median and returned 12.7%. On a three- and five-year basis, however, both funds were in the first and second quartile.
Fortin acknowledges as well that some more heavily weighted names did not perform as expected. "The second quarter was somewhat difficult for us," he says, adding that the funds have underperformed in other periods. "But we're disciplined in our approach and consistent throughout the market cycle. It's served us well over long periods."
A growth-at-a-reasonable-price investor, Fortin seeks businesses that are trading at a discount to their intrinsic value and offer a margin of safety, should markets weaken. He has been investing selectively in the energy and consumer-discretionary sectors and a handful of materials companies.
Fortin generally limits single positions to about 7% in the small-cap fund and 5% in the microcap fund, which has smaller, less liquid companies. Turnover is very low. For example, it was 2.4% for the small-cap fund for the six months ended June 30.
One top holding in the consumer-discretionary sector is Indigo Books & Music Inc. IDG, a leading retailer of books, gifts and specialty toys. "Management is reinvesting in the business by stepping up its general merchandise initiative and distribution capabilities," says Fortin. "It is also changing its store network to accommodate a mix that is more geared to general merchandise. We're seeing evidence of that strategy working."
Moreover, there is a margin of safety in the form of $6 cash per share, which is sizeable for a stock that is about $11. "This name is trading at a sizeable discount to our assessed intrinsic value."
A Sherbrooke, Que., native, Fortin started his career as an accountant after earning a bachelor of commerce at the University of Ottawa in 1995. Although he soon realized that public accounting was not for him, he used his skills to analyze financial statements at Soundvest Capital, as it is known today. "That laid the foundation for an appreciation of what makes a good business."
In 1999, Fortin moved to Edmonton and joined Telus Corp., where he worked as an equity analyst on the firm's pension fund. By the time he left in 2005, he was a senior analyst, responsible for Canadian financial services and consumer discretionary stocks.
Fortin moved again, this time to Connecticut, where he was hired by Stonebridge Advisors, a start-up investment firm. He was an analyst and portfolio manager, overseeing mainly North American equity-income securities.
In January 2009, Fortin returned to Canada to join Bissett Investment Management as an analyst, rising to portfolio manager in September 2010. It was a good fit, since he shared the firm's approach to stock-picking and long-term investing.
"It just happened that small-caps were available," says Fortin, who shares duties with Ralph Lindenblatt on both funds, backed by analyst Neil Forster. "Now that I'm here I've realized that it's a very dynamic marketplace with lots of opportunities to generate meaningful returns relative to other areas of the market,"
In that vein, Fortin is excited by relatively new holdings such as Marquee Energy Ltd. MQL, an Alberta-based junior oil and gas firm producing about 5,000 barrels of oil equivalent a day in the east-central part of the province.
"Well productivity is improving as they drill more wells. And the cost to develop these wells is also falling," says Fortin. "All of that equates to increasing returns for the company." The stock is trading at about 80 cents, which implies a discount to intrinsic value that is "solidly in the double-digit range."
