Jennifer Law, manager of CIBC Canadian Small-Cap, diversifies broadly by industry to offset the cyclical swings inherent in the resources-heavy small-cap segment. “We hold 60 to 80 names, with reasonable weights, and have exposure across all 10 sectors,” says Law, a vice-president and portfolio manager at CIBC Asset Management Inc. in Toronto.
Even so, resources stocks are too big a portion of the small-cap market to ignore. Law notes that about 45% of the small-cap universe consists of energy and materials stocks.
“When there’s a lot of volatility in commodity prices, you just have to stick with your good names,” she says. “We also keep a small portion in cash” for buying opportunities.
Currently, CIBC Canadian Small-Cap is slightly underweight in energy stocks. “But I think the valuations are looking attractive,” says Law, so she will add to favoured holdings, but in small increments. “We just want to make sure we’re not catching a falling knife.”
Some of Law’s resources-related holdings, such as services providers Western Energy Services Corp. (TSX:WRG) and Secure Energy Services Inc. (TSX:SES), have been hit hard. They were trading 30% to 40% higher in June. “We did take profit in June and July, so I want to buy back some of the names that we trimmed,” says Law, adding that the fundamentals for the two services companies haven’t changed dramatically, other than commodity prices.
Looking ahead, “if we have some stabilization in people’s outlook for oil,” says Law, “and in some of the base metals, I think we will have a very nice bounce-back in small-caps. There is capacity coming, there are new rigs coming, new production pads have been built. But right now it’s pretty murky out there.”
Among Law’s top holdings is Orocobre Ltd. (TSX:ORL), a mineral exploration company that is, in part, a lithium play. Lithium is used in batteries for electronic devices and vehicles. According to Law, lithium supply is lagging, with only about three producers producing 80% of the world’s supply.
“Demand is expected to grow anywhere from 10% to 20% over the next decade,” says Law. “And you have a company (Orocobre) that’s going into production with a great partner in Toyota Motor Corp., and that should be a big catalyst event for the company.”
A recent addition to the CIBC fund’s portfolio is AGT Food and Ingredients Inc. (TSX:AGT), which is in the business of trading and exporting grains and other foodstuffs. Previously named Alliance Grain Traders Inc., the company is expanding into new product lines. “The evolving taste in developing countries for gluten-free, protein and fibre-rich diets,” says Law, “plays into both the eating clean and export themes.” The company also supplies pet foods.
Specializing in small-cap investing during most of her career, Law, a native of China, moved to Vancouver at age 11. A graduate of the University of British Columbia, she received a bachelor of commerce degree in 1993. Upon graduation, she joined a family-owned venture capital firm called Unimet Capital Corp. as a corporate-finance associate. The position introduced her to the resource sector, and to the basics of putting together a business plan, finding investors and working with underwriters.
In 1997, Law moved to Toronto and joined Montrusco Bolton Investments Inc. as an analyst on the small-cap team. Two years later, she joined Empire Financial Group, where she was hired as manager of Empire Small Cap Equity. She obtained the CFA designation in 2001. In May 2003, Law joined her current employer, the then-named TAL Global Asset Management.
Internally at CIBC Asset Management, the biggest change for Law over the past three years has been the “deepening” of the research team. She now works closely with an associate portfolio manager, and draws on 10 senior sector specialists. In addition, the global resource team is a recent addition. “I have a lot more resources to fall back on,” says Law, “so that has been a huge and positive change for us here.”