Small-Cap Equity Fund

• Overview
• Manager
• Performance
• Holdings
• Commentary

October 2008

In a market with no legs, small cap stocks are usually the hardest hit.  This was the story in the third quarter.  Liquidity was poor and many of the portfolio’s holdings experienced substantial short-term price swings.  The Nesbitt Burns Small Cap Index fell 24.4% in the quarter, and is down 29.0% over the past 12 months.

The Small-Cap fund had its most challenging quarter, declining 18.4%.  Over the past year, it is down 16.8%.  

The manager of the fund, Wutherich & Company, has navigated through a number of market cycles and has thick skin for this type of volatility.  They are carrying a reasonable cash reserve (10%) as a cushion and are adding to existing positions opportunistically.   

The fund’s negative performance was the result of widespread share price declines in the market.  The portfolio’s modest holdings in the energy and materials sectors turned in particularly weak performance, with Flint Energy Services falling over 50% and Major Drilling losing 40%.  Wutherich took advantage of the weakness in Major Drilling to top up the position.  The company is one of the top hard rock drillers in the world and the manager sees great upside potential in the stock at its current level.

Many of the fund’s smaller capitalization holdings suffered from erratic trading.  Vecima Networks, a thinly traded stock that we have highlighted in the past, fell 29% despite reporting another solid quarter.  Similarly, Winalta, the smallest stock in the fund by market capitalization, dropped 24%, and Easyhome lost 18%.  There have been no fundamental changes to these businesses.  The manager added to all three during the quarter.

Two new stocks were added to the portfolio in the third quarter, Canadian Helicopters Income Fund and Gennum Corporation.  Gemcom, on the other hand, was removed from the fund on a takeout offer.

Canadian Helicopters is the nation’s largest helicopter transportation services company.  The company generates plenty of cash, pays a healthy distribution and has a number of stable contracts, notably in the emergency medical services field.  And importantly, the company’s senior management owns a sizeable stake in the business, which is an attribute that Wutherich pays close attention to. 

Gennum is a Burlington-based technology company that designs semiconductor solutions for video broadcast and data communications products.  The company has made great strides in the HDTV and IP (internet protocol) markets.  Wutherich has always liked the business and product line, and has been impressed with a reinvigorated management team (a new President and CEO joined the company in 2006 and has made progress in moving the business forward).  The stock dropped to an attractive entry point in the quarter (trading at roughly 10 times earnings), which was the final catalyst for initiating a position.   

The Small-Cap Fund has been our most volatile offering of late.  As we repeatedly emphasize, investors should be prepared for large short-term price movements, as this is an attribute of smaller capitalization stocks that is only heightened in a weak market environment.     
 
The fund’s geographic profile remains largely Canadian.  Wutherich continues to have a few U.S. companies on their watch list, but have not yet added any new foreign stocks to the portfolio. 

Following a September we’d all like to forget, one thing is clear – stocks are cheap.  And this won’t always be the case.  Wil Wutherich’s comment to us at the end of the quarter best summarizes the outlook for the fund: “We haven’t seen as good value across the portfolio since 2002.”