Fund in Focus: Leith Wheeler U.S. Small/Mid Cap Equity Fund
Building performance on out-of-favor companies
Launched in October 2016, Leith Wheeler U.S. Small/Mid Cap Equity Fund Series B from under-the-radar, Vancouver-based Leith Wheeler (with $21.8 billion assets under management) has built a solid track record of performance in a short time, delivering a 3-year average annual compounded rate of return of 5.9% as of Sept. 30. This has significantly outpaced its peer group’s 0.8% average return for the period.
Managers Raymond Lai and David Slater work closely with the other members of the small-cap equities team, using a fundamentally-driven, bottom-up process to look for companies with proven track records and sound valuations. They approach their investment as if they were buying the whole company and favour businesses with sustainable competitive advantages. Given the value focus, the managers are also somewhat contrarian and are not afraid to invest in companies that may be out of favour with the market.
As important as it is to find good investments, the managers believe it is equally important to ensure they are sized correctly in the portfolio. The goal in setting position size is to generate returns from the winners, while mitigating losses from the losers. When determining position size, managers consider the effect to the real risk of adding the company, the target price, confidence level, intrinsic value estimate and margin of safety, and their probability of success.
Top holdings as of June 30 included ASGN Inc. (NYSE: ASGN), CarMax Inc. (NYSE: KMX), Keysight Technologies Inc. (NYSE: KEYS), Brookfield Infrastructure Partners LP (NYSE: BIP), and Lamar Advertising Co. (NSD: LAMR).
The managers do not set out to find those “home run” stocks. Instead, they hold a diversified portfolio of companies that hit a lot of “singles.” The managers have noted that the fund’s performance has not been the result of huge wins but rather wins from most of their holdings.
This discipline has shown up not only in the returns, but also in volatility, which for the three years to Sept. 30 has been about the same as the category median. The fund is also strong at capital protection, participating in less than three quarters of the market drop over the past three years.
Leith Wheeler U.S. Small/Mid Cap Equity Fund Series B
Fund company: Leith Wheeler Investment Counsel
Fund type: U.S. Small/Mid Cap Equity
Style: Mid-cap blend
Risk level: Medium
Load status: No-load
RRSP/RRIF suitability: Good
Managers: David Slater since Oct. 2016; Raymond Lai since Oct. 2016
Fund code: LWF047
Minimum investment $25,000 directly through Leith Wheeler
Dave Paterson, CFA, is a money manager and an expert on investment fund research and due diligence on a variety of investment products.
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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. Dave Paterson is employed as an advising representative (portfolio manager) by Empire Life Investments Inc. (ELII), a subsidiary of Empire Life Insurance Company. ELII is the investment fund manager and portfolio manager of the Empire Life Mutual Funds and the portfolio manager of the Empire Life Segregated Funds (collectively, the Empire Funds). As such, his employment and his compensation may be connected to the success of ELII and the Empire Funds. From time to time, the Empire Funds may buy, sell, hold, or otherwise have an interest in securities that may be discussed in this report.