Unlike a lot of small-cap funds that look to shoot the lights out with big returns and big volatility, the Dynamic Small Business Fund takes a more conservative approach. Managed by the team of Oscar Belaiche and Jason Gibbs using what they call “quality at a reasonable price” approach, the fund has nevertheless delivered a compound average annual 10-year return of 13.82%.
The managers look for best-in-class businesses with strong balance sheets, dominant positions in their respective industries, and management teams that hold a significant stake in the business. Typically, these companies tend to exhibit low levels of volatility and generate growing levels of free cash flow. Given Mr. Belaiche’s background, the fund tends to be heavily exposed to energy (16.9%), real estate (13.5%) , and financials (8.1%), which combined made up 38% of the fund as of July 31.
In addition to their emphasis on stock selection, the managers are also quite active with their use of cash. Using macroeconomic indicators, cash is raised or put to work, depending on their estimate of the risk-reward outlook. Cash was about 22% at the end of last October, and by the end of July it sat at 7.6%.
Their approach has helped the fund avoid some pretty big drawdowns. In 2008, it was down 18% compared with nearly 50% for the BMO Canadian Small Cap Index. It was also up 1.5% in 2011, while the benchmark was down more than 16%.
Strong performance, below-average volatility
The fund’s longer-term performance has been stellar, earning an annualized return of 13.8% for the past 10 years. Shorter-term numbers have been less impressive on a relative basis, with a one-year gain of 18.6%, well behind the average 28% of its peers in the small-cap space. Some of this underperformance can be attributed to its higher exposure to interest sensitive holdings, which have been under pressure since last May.
As strong as performance has been, it has been done with a level of volatility that is well below average. Because of this, I don’t see this as a fund you buy for its upside performance. Instead, it is one you bring in to give you conservative small-cap exposure, which shouldn’t hurt you too badly in volatile markets.
I don’t think that its historic level of above-average absolute performance can be repeated. However, because of its relatively low levels of volatility, the fund appears well positioned to outperform over the long term on a risk-adjusted basis. I see this as a good fund for investors looking for conservative small-cap exposure in their portfolios.
Fund company: Dynamic Funds
Fund type: Canadian Small / Mid Cap Equity
Fundata FundGrade® Rating: D
Risk level: Medium
Load status: Optional
RRSP/RRIF suitability: Good
TFSA suitability: Good
Managers: Oscar Belaiche since August 2002; Jason Gibbs since March 2007
Code: DYN 087 (front end)
Minimum investment: $500
See the Fundata Fund Snapshot for more details.
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Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson's Top Funds Report and Mutual Fund and ETF Update, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.
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Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.