Looking beyond the current malaise, Luc Grenier is positioning his Canadian stock portfolio in anticipation of a robust market rebound. "I expect another high in the next two to three years," says Grenier, a 37-year-old portfolio manager who overseesIA Clarington Canadian Growth for Montreal-based Industrial Alliance Fund Management Inc.
"People are so pessimistic," says Grenier. "But there is also so much cash in money market funds and corporate America. We are starting to see some mergers and acquisitions, which says to us that companies are willing to pay up." The beleaguered biotechnology sector, for instance, is witnessing a spate of takeovers. "Over the last five years, we've seen premiums in the range of 100%," says Grenier, noting the 97% premium paid for CryoCath Technologies Inc., by Medtronic Corp. in September. "The market does not want to put that kind of value on these companies. But strategic players see the value. They're saying, 'This is our chance to snap up companies. It will make a big difference going forward.'"
A bottom-up stock picker, Grenier is bullish on small caps, which account for 30% of the holdings of IA Clarington Canadian Growth. "They are not billion-dollar companies, but they are growing very fast."
One favourite holding is Theratechnologies Inc. ( TH/TSX). The firm has completed Phase 3 clinical trials on a drug for HIV patients with abdominal fat accumulation. Its stock hit a high of $12.69 in October 2007, but has since plunged to around $4.
"It's the only product available for HIV-associated lipodystrophy," says Grenier, referring to the obese condition. "I am betting the company will be taken out, with a 100% premium, or a lump-sum payment from a partner in three to six months."
Another small-cap favourite is ZCL Composites Inc. ( ZCL/TSX), a manufacturer of fibreglass underground storage tanks. ZCL recently completed the integration of U.S.-based Xerxes Corp., effectively doubling its revenues. "It's growing its bottom line by a minimum of 50%," says Grenier, adding that ZCL is benefiting from a change in U.S. legislation that has reduced warranties for steel tanks to 10 years, from 30. The company, whose products have a 30-year warranty, has a 50% share of the U.S. fibreglass tank market.
ZCL's shares are $5, one-third of the $15 price in May 2007. "Like anything in the small-cap world, people panic," says Grenier, who initially bought the stock at $2 in 2005. "The large-cap names are the first to bounce back. But when these little companies come back, you don't expect 20% [upside] -- but 100% and 200%."
Running a 60-name fund, Grenier limits single holdings to about 5%. Turnover has been high, at 158.9% in 2007, although he trades around core positions.
In the current unsettling environment, small-caps have been a drag on performance. The fund had a loss of 23.2% for the 12 months ended Sept. 30, compared to the 17% loss for the median Canadian Equity fund. On a two-year basis, the gap was appreciably smaller, with the fund reporting an annualized loss of 1.8%, while the median return was flat.
A Montreal native, Grenier joined the investment industry in 1994 after graduating with a bachelor of business administration degree from Université de Montreal's École des Haute Études Commerciales. He spent a year working in Lévesque Beaubien's back office and then moved to the discount brokerage arm of National Bank of Canada, where he stayed for two years.
But Grenier always wanted to be a money manager. In 1998, he seized an opportunity to work on the team that ran Laurentian Bank's in-house U.S. equity portfolio. In 2000, he joined the bank's subsidiary, Laurvest, and began as an equity trader. Before long, he was also an energy analyst, when fund manager Pierre Bernard gave him that responsibility.
In September 2005, Grenier was recruited by Industrial Alliance and began managing the formerly named R Canadian Growth, which came under the IA Clarington banner in July 2007.
Although the economic environment looks bleak, Grenier is buoyed by technical indicators. Among those that he follows is the Chicago Board Options Exchange Volatility Index, also known as the VIX. A measure of market expectations of near-term volatility reflected in S&P 500 index option prices, the VIX is around 50, after falling from a record 69.9 in early October.
"We are close to testing the bottom," says Grenier. "Even if the economic news is not good for the next six to 12 months, it's a good time to buy. Markets will recover before then."
