In the Canadian small-cap universe, Jeff Mo, lead manager of the bronze-rated Mawer New Canada Fund, considers current market valuations elevated compared to historical averages, with some exceptions. Mo is a portfolio manager at Calgary-based Mawer Investment Management Ltd., and lead manager of the newly-launched Mawer U.S. Mid-Cap Equity Fund.
“With the current low interest-rate environment,” says Mo, “as well as the expectation that the economy should continue to recover after the pandemic-driven recession, Mawer also sees an argument for why stocks may not be overvalued.”
Top Sector Opportunities
According to Mawer, the market seeing the most growth and opportunities is in the information technology sector. “Many new IPOs are coming to market in the sector,” says Mo, “and software continues to make the world more efficient and add value.” However, the market has mostly recognized this, and valuations are often quite expensive. He still thinks there are times that investors could find opportunities, though.
Outside of technology, financials broadly remain a relatively inexpensive sector compared to the market average. “Many of these companies,” says Mo, “have a relation to the housing market in Canada, and with investors likely worried about the macroeconomic situation with housing, that could provide some bottom-up opportunities. “
The industrial sector is another area where Mawer has found some opportunities. While the name of the sector suggests capital-intensive business models, the sector has a large services component. “Mawer industrial holdings that have done well in the last year are Stantec Inc. (STN), and GDI Integrated Facilities Services Inc. (GDI) – both companies provide services to the broader economy.”
In the overall portfolio, the fund’s positioning of approximately 30% technology, 17% consumers, and 15% industrials, has been characteristic for a number of years, but that weighting ebbs and flows.
The Strategy
“Every company that goes into the fund,” says Mo, “is a wealth-creating company. When we look at the world, we define it between companies we think can create wealth by virtue of possessing a competitive advantage and companies that cannot.”
Approximately 48 primarily smaller Canadian companies make up the portfolio. During the investment process, the 35-member research team systematically creates a broadly-diversified mix of businesses, with excellent management teams, bought at discounts to their intrinsic values. The managers target a long-term holding period, five-years or longer, to allow for growth and to minimize transaction costs.
The research analysis blends both quantitative and qualitative assessments of a company. The strength and initiatives of the company’s management team is an essential stock criteria.
Three Layers of Risk Management
The small-cap space can be volatile, and risk management is particularly paramount. Mo has a three layered approach. The first layer, focused on quality wealth-creating companies, ensures that the companies have competitive advantages to withstand economic downturns.
The second layer is at the portfolio level. Among the diversified portfolio, there is a maximum of 20% in one industry, and no more than a 6% weighting in an individual holding.
The third layer is the team-wide approach. Jim Hall, Mawer’s former CEO, who remains as chairman, sits down twice a year with every portfolio manager for a risk assessment. The process spans the macro-economic level, the portfolio level, then the individual security level for “unintended consequences.”
Favoured Holdings
Among the top 10 holdings, Toronto-based Colliers International Group Inc. (CIGI), has been held in the fund for 20 years. It is the world’s fourth largest commercial real estate brokerage company. “The CEO,” says Mo, “has done a fabulous job of [moving from] a more cyclical brokerage revenue to a more stable services revenue base.” As well, “the company has demonstrated an excellent track record and has compounded client capital over those 20 years at a mid-to-high teen rate per annum.”
Another Toronto-based holding, Softchoice Corp. (SFTC), is one of the largest IT value-added resellers in North America, according to Mo. The company provides software and hardware services and advice, with a focus on smaller organizations that may not have the IT budget internally. “The company has an excellent, customer-oriented culture,” says Mo, “and because of that, they have been growing close to 10% a year for the last number of years.”
A third illustration is Edmonton-based North American Construction Group Ltd. (N5Z), a diversified Canadian provider of heavy construction and mining contractors. The company is the largest provider of outsourced, earth-moving services in the Canadian oil sands, as well as parts of Ontario, Quebec and the U.S. “What gives them their competitive advantage,” says Mo, “is their cost-conscious culture. They do their own maintenance which reduces the overhead and the cost of their equipment. The CEO has done a really great job in maintaining this culture and using it to continue to expand the company’s operations across North America.”
No New Investors
The fund has been closed to new investors since 2004 in order to manage the size of assets optimally for their clients. “Taking on more clients might impact returns for existing clients,” says Mo, “because the small-cap market is relatively limited in the universe of companies. Our firm is very grateful for the support of our clients who have maintained their assets in the fund.”
