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Sceptre Equity Growth
Over the past fifteen years the Sceptre Equity Growth fund has gained an average of 12.1% annually, outperforming most smallcap funds and the BMO Nesbitt-Burns Small- Cap index, which returned, respectively, 10.4% and 8.2%. More recently, the fund weathered the down market well posting positive annual returns since 1999, the weakest being a 1.7% gain in 2000. Admittedly, this did lag the Small-Cap index which gained 7.3% that year. On the other hand 2003 was a banner year for the fund, which posted a spectacular 66.7% gain. This performance was followed by a more muted 5.6% gain for the first three quarters of this year. The fund is managed by Allan Jacobs, who has been at the helm for eleven of the fund's seventeen years. Mr. Jacobs, who speaks passionately about stock picking, focuses on small and mid-cap stocks with between $150 million and $2 billion in market capitalization. He uses a low-risk bottom-up approach, selecting financially strong companies that have exhibited long-term profitability, good return on equity, and strong earnings growth yet which trade at low multiples. Mr. Jacobs also places strong emphasis on skilled management, which he considers essential for smaller companies. Over time, the fund's stock selection style has drifted from a value orientation to one that is now closer to growth-at-a-reasonable-price (GARP). To maintain focus the fund generally holds no more than about fifty stocks and invests mainly in Canadian companies. Care is taken to maintain adequate diversification but no explicit sector targets are set, which is in keeping with Mr. Jacobs' bottom-up approach. Once a stock is purchased it stays in the portfolio for as long as its fundamentals remain attractive. The fund's average 44% turnover suggests that this typically means a period of about two years. Factors that will trigger a sale include slowing earnings growth, a market capitalization that has grown such as to qualify the stock for the large-cap label, and the appearance of better stocks. Large price increases will also often trigger some profit-taking. The portfolio's fundamentals are, in aggregate, similar to those of the S&P Small Cap 600 index. Its earnings yield of 3.5% is lower than the index's 4%, driven down in part by a pair of biotech stocks. The dividend yield of 0.7% is also a bit lower than the index's 1% yield. On a price-to-book and price-to-cash-flow basis the fund is comparable to the index. From a value perspective the portfolio is a bit expensive as might be expected based on the fund's GARP style. At the end of September the fund held fifty stocks, two trusts, and a 8.8% cash position. The fund also held a small number of warrants and subscription receipts. Metals and Minerals was the top sector in the portfolio, followed by Consumer Products and Energy. The top holdings were Reitmans Canada, Peyto Energy Trust, and Petro- Kazakhstan, which together accounted for just over 11% of assets. During the third quarter the fund was fairly active buying six new stocks and selling nine, including Cinram International and CoolBrands International which had both been strong long-term performers for the fund. New purchases included Canfor, Peru Copper (an IPO), and Chap Mercantile, which has already climbed 100%. The fund's fairly large cash position during the past several quarters is not to be interpreted as a negative outlook, according to Mr. Jacobs. Rather, he attributes it to a recent excess of trimming over buying. However, he does admit to having become more cautious in recent years, citing geopolitical concerns. He adds that he does not intend to further increase the fund's cash holdings. Mr. Jacobs could not point to any single cause for worry, discounting concerns about oil prices, interest rates, and the rise of the Canadian dollar. He prefers instead to focus on selecting good stocks and harbours an almost contrarian cynicism regarding projections. When asked to choose a favorite recent pick Mr. Jacobs pointed out that one-third of current holdings have more than doubled in price since they were purchased. Names mentioned included Inmet Mining, Rona, and Wheaton River Minerals. On the worst pick side, he points to his first foray into biotech stocks, which worked out well for a time. However, both stocks have since dropped significantly. He took his lumps in this case, admitting that he failed to sell on bad news in a sector that he now recognizes is very much sentiment-driven. For a $5,000 initial investment the Sceptre Equity Growth fund is available everywhere in Canada. Residents of Ontario, BC, Manitoba, Saskatchewan, and New Brunswick may purchase units directly from Sceptre with no load, but those in other provinces must go through a dealer or broker. With a 1.72% MER, the Sceptre Equity Growth fund offers a conservatively managed portfolio and a superb record of performance for a modest cost. It is a worthy candidate for the small-cap portion of any well-balanced portfolio. However, its somewhat high volatility makes it most suitable for slightly more aggressive frugal investors. FF: Q3 2004 |
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