Small-cap specialist Ian Cooke maintains that careful stock selection is rewarding, in spite of the gloomy global macroeconomic picture.
"There are opportunities below the surface," says Cooke, co-manager of the $402-millionIA Clarington Canadian Small Cap A 
and vice-president at Calgary-based QV Investors Inc. "There are a number of companies that have shown over the long term that they have good business opportunities and management that are good stewards of capital."
Still, markets have moved up a fair distance since 2008. As a result, Cooke believes it's prudent to take a selective approach. "We think the best thing to do is to make sure the investments are concentrated in companies that have opportunities to grow, generate good returns on capital, and are trading at reasonable valuations -- and less than the market as a whole."
Working closely with Joe Jugovic and Leigh Pullen, Cooke runs a portfolio of about 36 companies, but will go as high as 40. Lately, the 4-star rated fund and its near-clone, the $304-million Ethical Special Equity , have outperformed their peers. For the 12 months ended May 31, the latter fund returned 2.8%, far surpassing the median fund in the Canadian Small/Mid Cap Equity category, which lost 14.1%.
QV Investors' success is partly attributable to merger-and-acquisition activity which took out holdings such as Astral Media Inc. and Gennum Corp. But the managers have also underweighted the volatile resource sector because of its inability to generate consistently strong returns on capital.
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Instead, Cooke and his colleagues have favoured companies such as Canadian Western Bank CWB. "For 21 of the last 22 years, it has had double-digit loan growth," Cooke says. "That growth has been buttressed by disciplined lending standards. This company is not in the capital-markets business and vulnerable to major losses. It's basic banking at its finest."
Canadian Western Bank is trading at around 12 times earnings, or slightly below the market. Although that discount is small, "it's a quality name, when you take into account its above-average growth and strong return on equity," says Cooke.
In a similar vein, he likes Pason Systems Inc. PSI, an oil and gas services firm that provides drilling-recording systems. With a 97% market share in Canada and a history of growing earnings, "they've clearly got a better mouse trap," says Cooke, noting that he's increased the holding on market weakness. "And they keep adding to their offerings."
A Calgary native, Cooke has been in the investment industry for a decade and developed an early fascination with investing while at the University of Calgary. He ran a painting company in his spare time and consulted a broker on investing his earnings. That led to taking the Canadian Securities Course and also drew him to the Calgary Portfolio Management Trust, a campus program.
After graduating in 2001 with a bachelor of commerce degree in finance, with honours, Cooke spent a summer as an equity analyst at Phillips, Hager & North Investment Counsel Ltd.
Then he seized an opportunity to work for Enron Inc.'s natural-gas trading office in Calgary. "It had been the most innovative company in the world, according to Fortune magazine," recalls Cooke. "It was an opportunity to learn about a lot of different markets."
Unfortunately, it was not to last as Enron soon collapsed. "It was sad to see, but also a valuable experience from an investor perspective," says Cooke. "Even the largest companies can pose tremendous risks."
Cooke was hired as an analyst at Savoy Capital, a now-defunct Calgary-based hedge fund, where he became vice-president and stayed for four years. In 2006, he joined QV Investors Inc.
In helping to run the small-cap mandate, which also includes the $83-million CI Can-Am Small Cap Corporate Class , Cooke uses several screens to sort through hundreds of names. This exercise, combined with intensive management interviews, results in a list of about 75 companies, which is further refined to less than 40.
Individual holdings are limited to about 6% of fund assets. Since the managers keep names for about five years, turnover has been generally low. In 2011, for example, it was 11.7% for IA Clarington Canadian Small Cap.
Although the funds have outperformed lately, Cooke acknowledges that they tend to lag in frothy markets, as was the case in 2009. Yet, over the long haul, the funds have been in the first or second quartile. For instance, Ethical Special Equity had a 9.3% annualized return for the last 10 years, versus 7% for the median.
Reflecting on today's battered market, Cooke believes it may continue to be volatile. Yet, opportunities do exist, he says. "Canadian Western Bank and Pason Systems are great examples of that. You want to focus on the underlying businesses and then invest opportunistically."
