Stephen Palmer is hoping his investment skills, which have produced red-hot returns for one of Canada’s leading hedge funds, can do the same for mutual funds available to small investors.
Palmer, 42, president of Toronto-based AlphaNorth Asset Management, launched AlphaNorth Growth Fund at the end of July. The fund, which requires a minimum initial investment of $1,000, is managed with similar stock-picking methods as Palmer’s sizzling hedge fund, AlphaNorth Partners Fund.
For the three years ended Aug. 31, 2011, the hedge fund had an average annual return of 47%, beating the alternative strategy category’s median return of 3.2% and placing the hedge fund at the top of alternative strategy funds ranked by Morningstar Canada.
AlphaNorth’s new mutual fund invests in small-cap companies rather than the micro-caps found in the AlphaNorth Partners Fund, which is closed to new investors. The mutual fund also faces restrictions on hedging activity and private placements. AlphaNorth’s assets under management totals about $150 million, including the mutual fund, hedge fund and two flow-through partnerships.
“There are limits to the level of assets you can run in a microcap fund and not hurt returns, due to limited liquidity of the stocks,” Palmer says. “We’ve started a more traditional, small-cap fund that invests in more liquid companies.”
AlphaNorth Growth Fund concentrates on companies with a market cap of $100 million-$1 billion. Palmer expects AlphaNorth to launch two more conservative, less volatile funds by the end of 2012 to broaden the company’s product line.
Palmer believes superior returns can be achieved by exploiting inefficiencies in the pricing of companies in the small-cap universe. A charting of stock returns by Morningstar Andex Charts during the 60 years from 1950 to 2010 shows that $100 invested in U.S. small-caps grew to $200,000 — four times the $50,000 achieved by the broadly based S&P 500 composite index.
“I like to maximize returns in the long term,” Palmer says, “and the best way to do that is to invest in the asset class with the best long-term track record.”
Palmer is no stranger to launching funds in scary markets. His hedge fund was started in December 2007; by the summer of 2008, the financial crisis was in full swing. After suffering a loss of 53% in 2008, the hedge fund went on to make gains of 161% in 2009 and 116% in 2010.
“The small-cap strategy traditionally does well after periods of market weakness,” Palmer says. “When there is panic in the Street, it’s not the time to be hedging stock; it’s the time to be buying.”
The market crash of October 1987 and the subsequent recovery had triggered Palmer’s interest in stocks. He was a high-school student at the time, and he went on to obtain an economics degree as a stepping stone to an investment career. His first job was in the compliance department of an insurance company, but he later shifted to the investment side. Prior to launching AlphaNorth Partners Fund in 2007 with co-founder, vice president and secondary fund manager Joey Javier, Palmer spent nine years as vice president of Canadian equities for Toronto-based AIG Global Investment Corp., managing small- and large-cap stock portfolios.
Although many junior companies in Canada are in the resources sector, AlphaNorth Growth invests in various sectors, including resources, technology, financials and health care.
The portfolio is concentrated in 21 names, although that number may expand as fund AUM increases. Palmer is willing to hold as much as 10% of the mutual fund in any one company if it’s an exceptional opportunity, but typically holds 3%-8% weightings. IE