Small-Cap Equity Fund

December 31, 2018

Market Context

  • The Canadian small-cap market (S&P/TSX SmallCap Index) declined 18.2% in 2018. Energy and commodity-related stocks in particular had a tough year.
  • U.S. small-caps declined 3.2% (Russell 2000 Index) in Canadian dollar terms.

Portfolio Specifics

  • The fund consists of 23 companies, ranging from very small (e.g. Brick Brewing) to medium-sized businesses (e.g. Oshkosh Corp.). While the majority of holdings are Canadian, there are four U.S. stocks which make up 20% of the portfolio.
  • The fund had a challenging year, declining 14.6%. Performance was strong in the first three quarters, where the fund was up 7%, but it fell 20% in the fourth quarter, which was one of the worst periods for small-cap stocks in quite some time.
  • A handful of stocks can be singled out as particularly poor performers in 2018: DHX Media, Maxar Technologies, Alcanna, Stericycle and NFI Group. DHX and Maxar were sold as the manager, Galibier Capital Management, lost confidence in the firms’ management teams. Additional shares were purchased in the other three stocks, as they continue to have attractive competitive advantages and compelling valuations.
  • Galibier was an active buyer during the broad market sell-off late in the year. The fundamentals of many of the businesses they own haven’t changed, yet prices were down sharply. The manager viewed this as a rare opportunity to add to positions in excellent companies such as Park Lawn, Spin Master, Oshkosh, WABCO Holdings, Premium Brands Holdings and Ag Growth.
  • There were a few positive stories to report. Parkland Fuel, a fuel and petroleum retailing company, had a good year (despite slipping in the fourth quarter) as its acquisition strategy and expansion into the U.S. are playing out well. Cargojet also had a strong year as demand for its services (overnight air cargo) remains high.
  • Investments in the resource sector remain minimal, as the manager believes few companies in the space have enduring, sustainable competitive advantages and are beholden to volatile commodity prices. Cardinal Energy is the one oil stock owned in the fund. Galibier likes Cardinal’s disciplined growth plan and focus on light oil.
  • The fund currently has a cash position of 1%.
  • The fund has gained 7.4% since September 30, 2016, which is Galibier’s starting date as portfolio advisor. The index is down 13.3% over the same period.

Positioning

  • The portfolio has a unique composition, with key areas of investment being capital goods, transportation, and commercial & professional services (these companies all fall under the broad Industrial Goods & Services sector). Food & beverage companies are also a notable component of the fund. This is in contrast to the small-cap market and its heavy focus on resource companies.