Since she started managing the $403-millionBMO Special Equity in October 1998, Lesley Marks hasn't veered from the fund's small-to-mid-cap mandate.
"Some funds present themselves as a type of small-to-mid-cap fund, but they really invest in large cap stocks," says Marks, who is vice-president and portfolio manager, Canadian Equities, at Toronto-based Jones Heward Investment Counsel Inc. "Some of our stocks graduate to become larger cap, but this is a true small-to-mid-cap fund." Stocks that successfully "graduate" above the billion dollar market cap level make up about 15% of the portfolio. Marks, 34, focuses on a bottom-up, stock-picking approach. "We're definitely more growth focused," she says. "You have the ability in smaller companies to find superior growth potential more often."
Quantitative measures determine her stock picks, whether it's assessing a company's potential through acquisitions or through internally generated growth. Marks considers internally generated growth a lower risk strategy.
Marks will typically hold most of the portfolio holdings for one to two years, depending on events. "Generally, I would say our average turnover is in the 40% to 50% range," she says.
Her sell discipline is based on four criteria: a negative change in overall fundamentals; a change in management that is not viewed as of the same calibre; a change in the company's strategy; or the stock reaching its target price.
Of the characteristic 50 to 70 diversified holdings, stock positions tend to be in the range of 1% to 3% of the portfolio. The cash position is "a fallout" from stock selection and ranges anywhere from 3% to 10%.
Marks's benchmark is the S&P/TSX Small Cap Index, but it doesn't drive her stock selection. In general, most sectors are fairly represented in her portfolio, but currently there are no holdings in telecom or utilities. The smaller telecom companies have not met the team's fundamental stock selection criteria. "And, it's very difficult to find any growth opportunities in utilities, that's sort of intuitive," says Marks.
Direct contact with companies -- through about 200 in-person meetings a year -- is a key element of the predominantly in-house research. Marks is directly involved with three-quarters of the management interviews.
BMO Special Equity ended 2004 with a top-quartile 20.9% return, outdistancing its Canadian Equity peer group by nine percentage points. During the past year, Marks credits "the right call" and stock selection in the energy sector for helping the fund to outperform. The Morningstar four-star rated fund has also performed in the top quartile over the past three and five years.
Marks considers her strong six-year track record, along with her experience, key strengths. "Because the universe is so large for small cap investing," she says, "you have to have the ability to focus your efforts. When I sit in with a management team, I can quickly get to what I think are the most important issues that will drive that investment to be successful."
Marks gained experience from a variety of firms before settling in at Jones Heward. In 1992 she received a bachelor of commerce degree from Queen's University. Upon graduation, she joined State Street in Toronto to work in portfolio accounting.
In March 1994, she moved to a small investment counsellor that no longer exists, where she was involved in equity research and trading. In June 1995, she joined Manulife Financial to concentrate solely on equity research.
Marks received her CFA designation in 1996. In October of that year, she left Manulife to join Canagex Investment Management Inc. (part of the Desjardins Financial Security group), to become a portfolio manager until subsequently moving to Jones Heward in October 1998. In 2002, she received an Executive MBA from the University of Western Ontario while working at the firm.
Marks draws on the six-member Canadian equity team for advice, and she works with one analyst who is devoted solely to small cap stocks. Because the group is so small, "really it's just a matter of popping into the office next door to bounce off ideas," she says.
Despite three years of strong performance in the small cap world, Marks is hopeful that there's still a lot of steam left. "Right now, the small caps in general don't offer as appealing a valuation as they did three years ago but they have other factors working for them," she says. "In a strong economic environment or a strong commodity-price environment, such as the one we're seeing right now, you could see the small caps outperform in spite of the fact that they're at fairly even valuations with large caps."
