Marc Lecavalier has managed to ring up some impressive performance numbers in his five-star rated NBI Quebec Growth Fund by focusing on companies that are either headquartered or do a meaningful portion of their business in Québec.
At mid-June, the F series of the fund topped the Morningstar Canadian Small/Mid Cap Equity category for the five-year period, with an average annual compounded return of 11.27%. The fund led a pack of 143 funds, and has consistently been a top performer over varying time periods with a below-average Morningstar risk rating and lower volatility than the category.
The smooth performance is particularly impressive, given that the fund focuses on small to mid-sized companies. Currently the fund has 55% of assets in companies Lecavalier classifies as small cap with a market capitalization of $50 million to $3 billion. Another 15% is in mid-cap companies with a market cap of $3 billion to $7 billion, and the rest is in large companies with a market cap of greater than $7 billion (Morningstar Direct has the fund’s distribution among small, mid and large cap companies around 33%, 28% and 9%, respectively, as at Jan 31, 2019).
The advantage of flexibility
“We invest in companies across the spectrum, which provides lots of flexibility to take advantage of opportunities,” says Lecavalier, vice president and portfolio manager with Montreal-based Fiera Capital Corp., the fund’s subadvisor.
With about $270 million in various series of the fund, Lecavalier doesn’t worry about the liquidity constraints that might concern a giant equity fund in Canada, and he’s free to invest even in micro-caps. Over the years, the fund has benefited from stellar performance in some companies that were purchased as micro-caps and held in the fund as they blossomed into successful large enterprises.
For example, Stella-Jones Inc. (SJ), a producer of utility poles and railway ties, is a multi-year holding. It was purchased when the firm’s annual sales were around $100 million and has grown to annual revenue in fiscal 2018 of $2.1 billion.
Another long-term holding is MTY Food Group Inc. (MTY), a franchisor and operator of casual restaurants under a multitude of brands including Cultures, Jugo Juice, Mr. Sub and South St. Burger.
Although all companies have a link to Québec, many do business on a national or global scale.
“The key to our success is identifying winners early and keeping them as long as there’s a good reason to own them,” Lecavalier says.
Solid selling discipline
He will trim a position if the stock becomes overly expensive, but says it often pays off to keep holding a good chunk if the company has a solid business model and room to grow.
“For sure we will take profits along the way, but just being overvalued is not a good enough reason to sell completely,” Lecavalier says. “We are always looking at a firm’s prospects three to five years ahead.”
For example, although he sold off some shares in discount retailer Dollarama Inc. (DOL) as the price rose and the expansion rate levelled off, the company continues to show positive momentum and remains in the fund.
Since the dramatic stock market correction in the autumn of 2018, small cap companies have not recovered as quickly as large caps, Lecavalier says. There is some nervousness in the market about the possibility of a global economic recession, which is luring investors to more defensive sectors such as utilities, telecom companies and real estate investment trusts.
As a result of this cautious mood, in recent months Lecavalier has taken advantage of stock price softness across the board to upgrade the quality of the portfolio and focus on companies with the most resilience to weather a potential slowdown.
“When everything is falling you can buy good companies at better prices,” Lecavalier says. “In the last few months, we have become more cautious and reduced our exposure to micro-caps. We take a bottom-up approach and don’t make macro-economic calls, but at this point we are a bit more liquid in the portfolio.”
No need for the big five banks
The fund differs from many competing Canadian equity funds as it does not hold the big five banks or giant energy firms that dominate the Toronto Stock Exchange. Instead, in the financial sector it holds sixth largest bank, National Bank of Canada (NA), as well as insurance and wealth management firm IA Financial Group (IAG) and alternative lender goeasy Ltd. (GSY). The only energy holding is Parkland Fuel Corp. (PKI), a fuel retailing company with several gas station chains.
NBI Quebec Growth’s investable universe is about 200 stocks, trading on either the TSX or the TSX Venture Exchange. Lecavalier limits the portfolio to about 50 names to give meaningful representation to each holding. Top holdings typically account for a maximum of 5% of the fund’s assets.
Among the stocks LeCavalier has been adding to recently is Heroux-Devtek Inc. (HRX), a manufacturer of landing gear and components for the aerospace industry. The company serves both the commercial and military sectors and has grown organically as well as through successful acquisitions.
“There has been a ramp-up in sales growth and the company is gaining reputation globally,” Lecavalier says. “We’re seeing a lot of positive momentum and it is well-positioned to survive any downturn in the economy.”
Another key holding that he has augmented recently is WSP Global Inc. (WSP), business management and engineering consulting firm benefitting from growing infrastructure spending around the globe. “Many global governments have committed to large infrastructure projects and we don’t anticipate a slowdown,” Lecavalier says.
The portfolio’s shift to higher quality is not necessarily tied to market cap, but to less cyclical business models, he says. He’s also added to Baylin Technologies Inc. (BYL), a small-cap manufacturer of antennas and other products used in the wireless communications industry.
A new name in the fund is Alithya Group Inc. (ALYA), a management consulting firm focusing on information technology. The small-cap firm is headed by Paul Raymond, a former senior executive at CGI Inc., a global IT consulting giant. “Alithya is like a small and growing version of CGI, and as a small cap firm it trades at huge discount to the megacap CGI,” says.
Companies that show disappointing results or cloudy future prospects are sold. Recent sales include mattress maker Sleep Country Canada Holdings Inc. (ZZZ) and troubled engineering firm SNC-Lavalin Group Inc. (SNC).
