The investment discipline of Martin Ferguson, the lead manager of the $1.2-billion Mawer New Canada 
, has resulted in the capping of his small-cap mandates.
"We continued to grow to a point where we said we can't take on any more money," says Ferguson, "because it just gets incrementally hard with each additional dollar brought into the mandate to do the best that we can for clients."
Ferguson, is a director, portfolio manager and head of the small-cap Canadian equity team at Mawer Investment Management Ltd. in Calgary. He has led the mandate, which has been capped since January 2005, since December 1996.
Ferguson also manages BMO Enterprise , which was capped on March 31, 2013. Jeff Mo is a co-manager on the funds. Ferguson is responsible for $2.2 billion in total assets under management, including institutional accounts.
Mawer New Canada won the award for Best Canadian Small/Mid Cap Equity Fund at the 2012 Morningstar Canadian Investment Awards. As well, the fund earned the Analysts' Choice Award as the best Small Cap Canadian Equity Fund in 2002, 2003 and 2004. In 2011, Ferguson was honoured as the Morningstar Domestic Equity Fund Manager of the Year.
Under Ferguson's tenure, the Morningstar five-star rated Mawer New Canada has an annualized 15-year return of 16.5% compared with the median 10.7% return in the Canadian Small/Mid Cap Equity category. During the more recent three-year period, the fund's margin of outperformance has been even wider, at 20.7% annually compared with the median 5.8%.
Despite the capping of the small-cap mandates, investors in balanced funds such as Mawer Balanced can get some exposure to Ferguson's strategy, since the balanced mandates hold approximately 7% in small-caps. "Our balanced clients are really our core clients," says Ferguson, "and we did not think it would be right to offer them a balanced product without the small-cap Canadian."
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Ferguson's strategy is based on a high-conviction portfolio of 40 to 60 names. He currently owns more than a 10% stake in one out of every three companies in the portfolio. "I like to say I have fairly big feet in a fairly small asset class."
The universe from which Ferguson selects stocks consists of 350 to 400 Canadian companies that have market capitalizations of up to three-quarters of the upper limit in the BMO Blended (Weighted) Small Cap Index, which is currently $1.4 billion.
Ferguson favours companies that can offer a high return on invested capital and that have strong management teams and sustainable, competitive advantages. He looks for "growth at the right price."
Before investing, Ferguson employs a discounted-cash-flow model to try to predict the cash flows over the next 15 years. He then uses Monte Carlo simulations to estimate the fair value range of a company and gauge future uncertainties, "because we can't be totally accurate; no one knows the future."
Ideally, says Ferguson, a wealth-creating company with a sound business model and management would be held forever. However, fundamental changes may occur. Historically, over the past 15 years, "our portfolio turnover has probably averaged 20%," he says. Ferguson's risk constraints include a maximum 6% weight in an individual security and a maximum of 20% in any individual industry.
Ferguson's current top holding is Constellation Software Inc. CSU, which he has held since the firm's initial public offering in 2006. About two-thirds of its revenue comes from government departments, such as transit, justice and housing. The software tends to be "mission critical," says Ferguson, so organizations need the software to run their business.
Constellation's client turnover is low, at about 5% a year, says Ferguson, so it has repeatable, diversified, constant cash flows. On top of that, it has "one of the best management teams in Canada that we've ever found."
Ferguson, 53, graduated in 1982 from the University of Alberta with a bachelor of commerce degree (with honours) majoring in finance. Upon graduation he joined the Alberta Treasury's investment-management division as a junior analyst.
In 1985, the year he earned the CFA designation, Ferguson moved to Principal Securities Management Ltd. as an analyst. When Principal collapsed in 1987, he was welcomed back at Alberta Treasury. He eventually became the senior manager, equity research, contributing to the management of Canadian equity assets in excess of $3 billion. He joined Mawer in 1996.
Along with quantitative methods, extensive, hands-on research is an integral part of Ferguson's investment process. The managers will meet with executives of every company held in the portfolio at least once a year, along with potential new companies.
Ferguson is also always open to tapping into unofficial research sources. "My knowledge base is very broad," he says, "and hopefully I have some depth, which I believe I do, in most of the industries. So if I've got a welder beside me on the plane who works in the oil sands, I should be able to talk to him."
