In the big time with small-caps

The $152-million National Bank fund has demonstrated impressive performance, consistently beating its peer group and benchmark market indices. As of Oct. 31, the fund had a sparkling 13.2% average annual compounded return over 10 years.

Toronto-based Morningstar Canada ranks the fund first in the Canadian small- and mid-cap category for the 10-year period, and the fund’s performance is miles ahead of the category’s 5% average annual return. Since inception in 1999, the National Bank fund has delivered a robust average annual gain of 12.5%.

“I’m a bottom-up investor and buy companies when I see upside potential,” says Lecavalier, age 38. “There’s a bias in the fund toward small-cap, and there’s more opportunity to find hidden value in these names. However, if we see value in large-cap names, we also can include those holdings.”

National Bank Quebec Growth Fund has left stock market indices in its dust, with its 10-year average return more than triple the comparable 3.7% return of the BMO small-cap index. Shorter-term numbers also are impressive, with an average annual return for the fund of 20% for the five years ended Oct. 31, 18% for the three-year period ended on the same date and 21% for one year. The fund was under the command of Lecavalier for these periods.

The fund’s mandate is to invest in firms that either have a head office in Quebec or do a substantial part of their business in Quebec. All holdings are based in Canada, and trade on either the Toronto Stock Exchange or the TSX Venture Exchange. Many of the fund’s holdings also do business nationally and some have a significant presence in the U.S.

Lecavalier says the fund typically invests about two-thirds of its assets under management (AUM) in small-cap stocks and one-third in large-cap, which gives him a lot of flexibility to take advantage of opportunities across the board. Lecavalier, as part of the team managing a private, micro-cap stock pool within Fiera, gets an early look at undiscovered, fledgling companies. As some mature and prosper, they become part of a “farm team” for National Bank Quebec Growth Fund.

“The edge we have is that we are good at micro-cap investing and can spot small companies that will become successful larger companies,” Lecavalier says.

He invests in companies with a market cap of least $50 million. The fund’s average market cap for holdings may range widely, between $1 billion and $7 billion, and currently is around $3 billion, Lecavalier says.

“The beauty of the fund is that it’s different from most mutual funds in Canada, which typically have a large exposure to the big banks, energy and big gold companies,” he says.

About 33% of the National Bank fund’s AUM is held in industrials, 17% is in materials, 16% is in consumer discretionary and 11% is in consumer staples. Top holdings include Stella-Jones Inc., WSP Global Group Inc., Alimentation Couche-Tard Inc., Richelieu Hardware Inc., Industrial Alliance Insurance and Financial Services Inc. and TransForce Inc. Many of the fund’s top holdings have been favourites for several years.

Lecavalier’s universe of “investible names” is about 200 stocks, but he limits the portfolio to 40 or 50 names to avoid dilution of his best ideas. Top-weighted holdings typically account for 4%-5% of the fund’s AUM. “Having too many names means bringing in your lesser ideas,” he says. “You can’t have 60 or 70 good ideas; at some point, you need conviction.”

Lecavalier’s style is to invest gradually in companies, adding to the fund’s stake as these firms evolve and how the companies’ management teams respond to various changes and challenges in the marketplace. Lecavalier will start with a weighting of 75 basis points to 1.25% of fund AUM, and increase that weighting opportunistically as he becomes more confident, even if doing so comes at a higher price.

He observes a company’s ability to survive tough times, and focuses on those that emerge stronger than their competitors and may then be in a position to acquire attractive growth assets or other companies when prices are down. Lecavalier avoids companies whose fortunes are tied to uncontrollable external factors, such as commodities prices or interest rates.

“Averaging up is always better rather than down,” he says of his stock-buying strategy. “When you average down, there’s often something wrong, such as a bad acquisition or a balance sheet that’s out of control. If the company is doing better and the business model is improving, [paying more per share] makes sense.”

Many small-cap firms are not well covered by analysts, and that means doing a lot of legwork and personal investigation through company visits and conversations with management. This kind of trail-blazing can lead to early identification of success stories.

For example, Lecavalier first bought shares in Stella-Jones, a producer of utility poles and railway ties, more than a decade ago, when annual sales were around $100 million. Revenue now is about $2 billion.

“We look for companies with the ability to grow organically, as well as through acquisitions,” he says. “If we can find those two qualities along with good leadership, that’s the recipe for success. And if we find [those firms] before anyone else, that’s even better.”

Lecavalier likes to see corporate managers who have “skin in the game” in terms of share ownership and who are able to articulate and execute a clear growth strategy. Lecavalier also holds a magnifying glass to the balance sheet, making sure a company has the ability to manage its interest and debt repayment obligations. Previous experience as a corporate bond analyst gives him an advantage in assessing balance sheets, he says. He also looks for astute fiscal management, such as optimizing tax strategies. Dividends aren’t an essential requirement, as many up-and-coming small companies prefer to reinvest in growth.

“If all of the catalysts are in place, multiple expansion will happen to the stock price as sales and profits grow and the company becomes recognized by more investors,” Lecavalier says.

He first learned about the stock market from his father, a radio and television sports broadcaster who invested in stocks. Even as a teenager, Lecavalier was aware of the potential for exciting profits in the market, and when he went to university, he began buying stocks, using money from student loans. He graduated from Université de Sherbrooke with a bachelor of business administration in 2000, followed by a master’s degree in finance in 2001 from the same university. While at university, his program involved internships at ING Group and Natcan, the asset-management division of National Bank. (Fiera purchased Natcan from National Bank in 2012.)

After graduation, Lecavalier was offered a job at Natcan, beginning as a high-yield bond analyst. Equities were his first love, however, and he moved to the small-cap equities team in 2004.

He contributed to the portfolio management of a variety of funds, including a Quebec-focused micro-cap fund and a venture-capital fund. In 2007, he became lead portfolio manager of National Bank Quebec Growth Fund.

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