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Newsletter Archive
Q1/6 Focus on ETFs
Q4/5 LW Canadian Equity
Q4/5 Saxon High Income
Q3/5 Saxon Small Cap
Q3/5 BG Income
Q2/5 Trimark Canadian
Q2/5 MB Fixed Income
Q1/5 BG Canadian Intrinsic
Q1/5 MB American Equity
Q1/5 Mawer N.C. Closure
Q4/4 Mawer Cdn Equity
Q4/4 Mawer Balanced RSP
Q3/4 Sceptre Equity Growth
Q3/4 Saxon World Growth
Q2/4 BG Small Cap
Q2/4 Mawer U.S. Equity
Q1/4 PH&N Cdn Growth
Q1/4 Leith Wheeler US Eq
Q4/3 iShares S&P500
Q4/3 BG Canadian Equity
Q3/3 North Growth US Eq
Q3/3 HSBC Mortgage
Q2/3 MB Cdn Eq Growth
Q2/3 Batterymarch US Eq
Q1/3 Saxon Stock
Q1/3 BG Balanced
Q4/2 Mawer New Canada
Q4/2 Perigee T-Plus
Q3/2 PH&N Dividend Inc
Q3/2 PH&N Bond
Q2/2 Leith Wheeler Cdn Eq
Q2/2 Perigee Diversifund
Q1/2 PH&N Cdn Equity
Q1/2 Mawer U.S. Equity

Saxon Small Cap

Over the past fifteen years, the Saxon Small Cap fund has exceeded the performance of the BMO Nesbitt Burns Small Cap (NBSC) index, yielding an average return of 14.9% annually to the index's 10.8%. While long-term performance has been impressive, the fund has significantly lagged the index over the past year. The index's upward surge has been fueled in part by the strong performance of the energy sector. However, the Small Cap fund has not benefited because it holds few energy stocks.

The fund is managed by well-known smallcap authority Bob Tattersall, who was joined by Scott Carscallen in 1999. Together these managers apply Saxon's highly successful value approach to investing, selecting mainly Canadian stocks with less than $300 million in market capitalization for the fund. The managers seek companies that are trading below their intrinsic value based on a variety of traditional indicators. Disciplined and in-depth bottom-up analysis of candidate companies forms the backbone of Saxon's stock selection process. Calculating a company's intrinsic value, which is the price that a reasonable person in the same industry would pay to purchase the entire company, is a key component of this analysis. Company visits help to further validate and give substance to the raw numbers that appear in a company's financial statements. Such visits play an important role in further supporting the fund managers' decisions.

Another key mainstay of Saxon's approach is that, once purchased, stocks are generally held for the long term. The Small Cap fund's low 30% average turnover is a testament to this approach and suggests that a stock typically remains in the fund's portfolio for about three years. A target price of 25% above intrinsic value is usually set. Once that price is reached the stock is sold, but unexpected developments, or a significant deterioration of a company's balance sheet may also trigger a sale.

At the end of the third quarter the fund was, in aggregate, reasonably inexpensive based on most measures. Its median ratio of price-to-sales was low at 0.58, and its price-to-cash flow ratio was a modest 8.4. The fund's median price-tobook ratio of 1.37 was also relatively attractive. Keeping in mind that small companies typically don't pay large dividends, the fund's 1% dividend yield comes as no surprise. However, the fund was expensive on the basis of its median price-toearnings ratio of 45.3, which translates to a 2.2% earnings yield. But when considered against the NBSC index's median P/E ratio of 118, the fund doesn't look so bad after all. All in all, the fund's portfolio was a good reflection of its small-cap value style.

At the close of trading on September 30th, the fund held eighty-nine stocks and a 12.1% cash position. The cash reserve has been above 10% since before the end of the first quarter. During the third quarter it remained high because of significant portfolio activity which saw the fund dump seven stocks and initiate six new positions, with sales overtaking purchases. At quarter end, the fund's top-three sectors were industrials, materials, and services, and the top-three stocks were Charming Shoppes, Gentry Resources, and Aur Resources. The fund sold Blair, Devlan Exploration, Hammond Power Solutions, Paradyne Networks, Real Resources, Thunder Energy, and Wajax Income Fund during the quarter. At the same time it added DRAXIS Health, GEOCAN Energy, Great Plains Exploration, Grey Wolf Exploration, Husky Injection Molding Systems, True Energy, and Zhone Technologies.

Several of the third quarter's sales were triggered by conversions of ongoing businesses to trust structures. Generally, Mr. Tattersall doesn't favour income trusts unless they are 'busted', which means that they are in some distress. A trust that recently cut its distribution would be a good example of a distressed trust. As a result of this preference, newly minted trusts tend to be sold.

Asked to pinpoint his best stock pick of the last few years, Mr. Tattersall points to Creo Inc. At the time of purchase it was a former growth stock that had fallen out of favour with growth investors. However, after falling to a cheaper price it was attractive. Mr. Tattersall also believed the company to be a likely takeover candidate. Uncharacteristically, the fund sold Creo a mere six months after its initial purchase, shortly before the company was acquired by Kodak earlier this year.

But Mr. Tattersall also takes his lumps, indicating SR Telecom as his worst recent pick. A global wireless telecom company, SR Telecom catered mainly to government clients. The stock was originally purchased with some reservations about future sales, but the outcome turned out to be far worse. Orders were much slower than expected and the company found itself squeezed for capital by its banks. Forced to raise more equity, the company saw its share price tumble. The fund exited SR Telecom in the second quarter of this year.

So far this year the fund has underperformed the NBSC index mainly because it holds only half the index weight in red-hot energy stocks. The fund has also lagged relative to the broader markets in a reflection of the recent weakness of the small cap sector. Mr. Tattersall points to the sector's low relative representation of energy and interest rate-sensitive stocks as the driving force behind the weakness. However, going forward, Mr. Tattersall is cautiously optimistic that declining energy prices (in the short term) and rising interest rates will bring renewed strength to the small-cap sector and to the fund.

The Saxon Small Cap fund is available everywhere in Canada for a reasonable $5,000 minimum investment. It can be purchased through dealers and brokers, or directly from Saxon.

With a low 1.87% MER, a lower than average volatility, and a superb long-term performance record, the Saxon Small Cap fund is an excellent candidate for adding an aggressive edge to a frugal investor's portfolio.

FF: Q3 2005



Disclaimers: Consult with a qualified investment advisor before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...