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WINNIPEG (GlobeinvestorGOLD) — Mike Weir runs a little-known fund that after 32 years in business is one of the oldest small-cap portfolios in Canada. It's also the most successful fund in the sector over the three decades of its existence.
Since inception in 1972, the GGOF Enterprise Classic Fund has produced a 10.7-per-cent average annual return, well above the 9.0-per-cent average annual return of the broad Toronto Stock Exchange in the same period. Over the 20-years for which peer-performance data are available, it produced a 9.9-per-cent average annual return, making it the top performer for the two-decade period.
The $30-million portfolio returned 37.8-per-cent for the 12 months ended March 31, 2004, compared with the 50.5-per-cent return of the median Canadian small-capitalization fund in the in one-year period. Mr. Weir, who is a managing director of Toronto-based Guardian Capital LP, has headed the fund — part of the Toronto-based GGOF Guardian Group of Funds — since September 2000 along with co-manager Mike Christodoulou.
Currently, the fund is run mostly on the "growth at a reasonable price" principle. Often called GARP, the method monitors the ratio of price to earnings (p/e) divided by the rate of growth of earnings or other measures of corporate progress.
"We're GARP managers, but that's just one element of our investment decision-making process," Mr. Weir said. "We also look at the predictability of growth, the quality of the balance sheet, and the entrepreneurial culture of the company. Even when we buy resource companies, we buy not for the commodity price play, but for their ability to grow despite volatility in their underlying commodity prices."
Today, the portfolio is almost fully invested. The largest weight is industrials (28 per cent), followed by consumer discretionary companies (18 per cent), materials (16 per cent), energy (12 per cent), information technology (9 per cent), financials (4 per cent), and health care (4 per cent), with the residue in cash.
"We're overweight industrials, not because we're sector allocators, but because we're stock pickers and we have found opportunities in that sector," Mr. Weir said. "When we see stocks that are selling for less than we think they're worth, we buy them. Our goal is to find companies that can sustain growth for three or more years."
Stantec Inc. is the portfolio's biggest holding. It's a civil engineering company based in Edmonton. Purchased at an average cost of $6.23, shares have recently traded at $28.65, 18 times $1.60 earnings per share expected for the year ended Dec. 31, 2004 and 15 times earnings, which are expected to grow by 15 per cent to $1.90 the following year, Mr. Weir said. Within 24 months, the stock could rise to $39, he added.
Sherritt International Corp. is a Toronto-based diversified resource company with substantial mining and oil interests in Cuba. Bought at an average cost of $3.68, shares have recently traded at $6.43. Some people see the stock as a value play because, with its dependence on Cuba, the shares historically have traded at a discount to comparable companies not doing business in that country, Mr. Weir said. That discount alone is not a reason to buy Sherritt, because the Cuban connection could be a value trap, he explained. But Sherritt is attractive for its ability to grow its commodities business at 20 per cent per year, he said. With a p/e ratio of 6.4 times expected earnings of $1 a share for the year ended Dec. 31, 2004, the company, though cyclical, should see its share price hit $8.00 within two years, he noted.
Ritchie Bros. Auctioneers Inc. is a Richmond, B.C. company that sells used heavy equipment around the world. As an auction house, it has become the Christie's of used road graders and front end loaders, Mr. Weir said. The company insists that its goods not be subject to reserve bid restrictions and thus is able to sell what it lists at a growing number of locations around the world, he explained. Shares purchased at an average cost of $21.08 have recently traded at $40.50, 15 times his estimates of $2.70 earnings per share (U.S.) for the year ended Dec. 31, 2004. Those earnings are 17 per cent above $2.30 a year earlier, he said. Within 24 months, shares could reach $50, he added.
GGOF Enterprise Classic shows the relatively steady performance that GARP management produces, said Dan Hallett, president of Windsor, Ont.-based Dan Hallett & Associates, a mutual-fund research company.
"During the bear market, from early March, 2000 to the end of March, 2003, the fund lost just 4.0 per cent, compared with a loss of 20 per cent by the benchmark BMO Nesbitt Burns Small-Cap Index," he explained. "The investor has traded some performance for safety. This fund is a good core holding for small-cap exposure in Canada, with relative safety compared to others in the sector."
Andrew Allentuck writes about investments for The Globe and Mail, and reviews books on finance for globefund.com and globeinvestor.com. He is also the author of several books.