IA Clarington Canadian Small Cap is a top pick

Canadian small-cap stocks have lost ground this year, but IA Clarington Canadian Small Cap Fund has bucked the trend. Its strong, consistent track record and relatively low volatility makes it, in our view, a top pick among its peers.

Lately, small-capitalization stocks have underperformed their large-cap cousins on a global basis, thanks to uncertainties about the strength of world’s economy. And Canadian small-cap stocks have been hit particularly hard, as commodity prices have crumbled, thus causing the country’s many resource stocks to sharply fall.

But one Canadian small-cap fund has bucked the trend. While the BMO Canadian Small Cap Index declined 1.5 per cent in the first 10 months of this year, IA Clarington Canadian Small Cap Fund gained 7.2 per cent over the same period. This outperformance was due in large part to the fund’s underweight position in resource stocks.

IA Clarington Canadian Small Cap’s (CCM520 (FE), CCM521 (DSC), CCM975 (LL)) objective is to maximize long-term growth of capital by investing primarily in equity securities of Canadian small-cap companies. The fund’s prospectus defines a “small-cap” company as one whose shares have a market capitalization (stock price times the number of outstanding shares) of less than US$2.5 billion.

Small-cap firms are frequently at the early stages of their development. As such, they face a number of risks that their larger-cap cousins needn’t concern themselves with. Three risk factors that small-cap companies often face are a limited access to capital, inexperienced management and volatile sales demand. If any one of these factors turns against the company, earnings and sales may plummet.

One of the best ways to invest in small-caps, then, is through equity funds. They give you the instant diversification you need to reduce the risks of investing in small-cap stocks.

Fund’s adviser follows a blended style

Clarington Small Cap’s portfolio sub-adviser is QV Investors Inc. QV’s investment approach is to evaluate stock candidates using a top-down, bottom-up value and growth analysis. The adviser’s key criterion for selection is quality growth. It looks at the merits of a company before even looking at its sector. It identifies and typically invests in stocks with lower valuations that are growing at higher rates than the market.

It’s an approach that has delivered excellent results over time. These past 10 years, the fund’s compound annual return is 10.5 per cent. That ranks in the top quartile of the Canadian small/mid-cap equity category. The average fund in the category delivered an annualized return of just 7.6 per cent over the same time, while the category benchmark, the BMO Canadian Small Cap Index, gained an annualized 3.9 per cent.

If Clarington Small Cap’s performance is strong, so is its consistency. In fact, the fund has performed in the top half of the category in each of the past 10 years. It was a top-quartile performer in eight years, and a second-quartile performer in two years.

Volatility, meanwhile, has been lower than average for the category. Indeed, the fund’s volatility rating of five out of 10 is similar to those of some of the more conservative Canadian stock funds we recommend. But though its relatively low volatility cuts the fund’s risk, its focus on smaller-cap stocks poses risks that large-caps don’t have to contend with.

We like this fund, then, for its strong, consistent track record and its relatively low volatility. IA Clarington Canadian Small Cap is a long-term buy if you want superior return potential from a Canadian small-cap fund and you can tolerate medium to high risk.


Canadian Mutual Fund Adviser, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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