Alexander Lane had a Eureka moment about four years ago on his approach to small-cap investing. "I wrote it down and that's where this secular/cyclical philosophy was fleshed out," says Lane, a vice-president and portfolio manager at Goodman & Co., Investment Counsel Ltd., in Toronto, which manages the Dynamic funds.
"My primary focus is on these core, secular growth companies that have long-term trends, that are less economically sensitive, and you just ride them out," says Lane. But to enhance performance, you can't leave out the cyclical companies, he adds. "Combining the two, and then using a forward-looking view to create interplay, gives you the ability to manage the positions and the volatility to great effect."
Lane, 34, has been lead manager of the $103-millionDynamic Power Small Cap since July 2004, having co-managed the fund since October 2003, and has managed Dynamic Power Global Navigator Class since its inception in July 2008.
Lane's investment process starts with a macroeconomic view over a three- to five-year horizon. After looking at a whole host of economic and industry metrics, he identifies thematic sector plays.
From there, he tries to find great businesses with sustainable growth. He holds a fairly concentrated portfolio of 40 companies, though individual stock weights generally don't exceed 5% of the overall portfolio.
An example of one of Lane's current themes, investing in infrastructure, is GENIVAR Income Fund, ( GNV.UN/TSX), a Quebec-based engineering and construction firm. He says GENIVAR's growth rate has been strong, and its business is not very capital-intensive.
The macro theme of unconventional oil and gas extraction led Lane to invest in Storm Exploration Inc. ( SEO/TSX). He says the company is tapping into northeast B.C., which has a better royalty structure than most other jurisdictions in Canada, particularly Alberta. So it's cheaper to develop.
"The company has arguably the best set of assets and associated facilities and infrastructure for development," says Lane. As well, management owns 28% of the company, "so they're aligned with us, and that's also true of GENIVAR. The management ownership is very high and we like that."
Lane's key screening criteria include free cash flow, earnings growth, earnings surprises, earnings revisions and earnings momentum. He does not use stock-price momentum indicators. Almost without exception, he'll talk to the management of every company he holds.
Lane is wary of weak balance sheets. If there's any balance sheet with any risk of bankruptcy within the next two years, these companies may not exist, so you want to avoid "these torpedoes," he says.
When it comes to the sell discipline, Lane quotes a favourite phrase from Goodman & Co founder Ned Goodman: "You don't have to ride out with the horses you rode in on." By this, Lane means that if the fundamentals of a company change, if he and his colleagues start seeing deterioration in a company, or if they've made a mistake, then it's time to sell the position and move on.
Under Lane's tenure, Dynamic Power Small Cap's relative performance has been superior, though it has been hurt by bearish markets. The fund has outperformed its Canadian Focused Small/Mid Cap Equity peer group over five years with a top-quartile annualized return of 1.4%, compared with an annualized 7.9% loss for the median fund. The fund slipped to the second quartile in the most recent 12 months ended March 31 with a 37.3% loss, but the median loss of 44.6% was considerably worse.
While Lane admits that the timing of the global mandate launch could have been better, the rationale behind the fund still holds very true. "It boggles the mind," he says. "I'm buying some of the absolute best global companies in these spaces."
A graduate of Queen's University, Lane received an honours bachelor of commerce degree in 1997. Diploma in hand, he joined TD Asset Management Inc. as an analyst. He was promoted to assistant portfolio manager in 1998, with the launch of the TD small-cap mandate.
Then in 2000, he was appointed a vice-president and portfolio manager. He received the CFA designation in 2000, the year he joined the Goodman team as an analyst. Lane became a portfolio manager in October 2003, then-vice president in 2006. Currently, he is responsible for approximately $170 million in total assets under management.
While Lane says the risk of small caps makes people hesitant to invest, he believes it to be the single best performing market segment whenever an economic recovery occurs. "I feel optimistic right now," he says, "given the correction we just experienced. This is a great opportunity to find those surviving names with the long-term potential, with the mid-cap names falling down into the small-cap universe, before they revert back to the mean."
