Inspired by the golden apples of ancient Greek mythology, Randy Oliver, founding president of Calgary-based Hesperian Capital Management Ltd., has harvested abundant riches from the family of Norrep mutual funds managed by his firm for the past seven years.

The word “Hesperian” is derived from Hesperides, mythical nymphs whom, according to Greek legend, lived in a lush paradise at the western end of the Earth and guarded trees laden with golden apples. From his western Canadian headquarters, Oliver has overseen the management of a growing group of funds that hasn’t seen a losing year since he took over the original Norrep fund in 1999. In fact, 2002, the worst year for the flagship Norrep Fund, saw it gain 20.7%. The best year for the fund, which focuses on small- and mid-cap companies, was 2000, with a 45% gain. The fund’s average annual compound return for the five years ended Oct. 31 was 27.1%, placing it second among small-cap funds ranked by Morningstar Canada, behind Resolute Growth Fund’s 41% increase.

“It’s a record we cherish,” says Oliver, pointing to charts that show the Norrep fund beat the returns of its benchmark, the BMO Nesbitt Burns Small Cap Index, every year since 1999. Even more impressive, every year since 2000 the fund has placed ahead of 13 key market indices, including not only the BMO Nesbitt Burns small-cap index but S&P/TSX total returns, Scotia bond index, Dow Jones industrial average, MSCI World, Russell 2000 and Nasdaq.

Norrep Fund was closed to new investors earlier this year, but other funds are available within the group, which manages about $260 million in assets. Hesperian also manages Norrep 11 Class, which has a portfolio similar to Norrep Fund but also invests in Hesperian-managed energy-related flow-through share partnerships as they mature and roll into the fund.

Hesperian has launched a series of Norrep limited partnerships for flow-through shares, and the resulting familiarity with opportunities in the oil-and-gas business has led to some profitable holdings for the Norrep funds. In early 2004, Norrep Q Class was launched, with Keith Leslie, Hesperian’s vice president, at the helm. Norrep Q applies a strict quantitative approach based on measurable financial characteristics, and will invest in companies of all sizes. The other two Norrep funds focus on small- and medium-size companies with market capitalization of less than $1 billion if they are based in Canada, and less than $3 billion if they are in the U.S. The average capitalization of the companies in these two funds is $500 million. Plans are in the works to introduce U.S. small-cap fund and a U.S. quantitative fund, and ultimately European, Asian and global funds.

“We will stick to what we do best, and gradually expand to other areas around the world,” says Oliver. “But we only want to grow as long as we can offer measurably superior performance in all our products, and will ensure we don’t outgrow our skill sets. I would rather create a great company than great wealth.”

When looking for investment opportunities, small caps are one of the most fertile areas to explore, although the stocks Oliver favours are seldom covered by analysts or recommended. In fact, he takes advantage of securities rules that allow up to 10% of assets to be invested in “illiquid securities,” such as promising private companies that will ultimately go public.

Brokerage houses, by the very nature of their businesses, must allocate time and energy only to small-cap stocks with high turnover, he says, or “story stocks” for which news will generate heavy trading in the stock. Alternatively, the Street may take an interest in a small-cap company with an upcoming equity financing, but that would dilute the holdings of existing shareholders, Oliver says.

“The potential trading commissions on a company with a capitalization of under $500 million typically do not even justify one research report, let alone regular coverage, unless an equity issue is a possibility,” Oliver says of small-cap coverage on the Street. “We instinctively do not like the characteristics of small-cap companies that are attractive to the sell side of the financial services industry.”

He looks for companies whose earnings are growing faster than the market average, and hopes for rising price-to-earnings multiples as the companies mature and become more broadly recognized. In addition to building portfolios with a lower P/E ratio than the index and a higher return on equity, Oliver’s team monitors 14 other factors indicating corporate balance sheet and earnings strength, as well as share-price momentum. After running computerized screening programs to find the companies that meet his criteria, Oliver and his team apply fundamental analysis to potential investments.

@page_break@“We do a sort based on fundamentals,” he says. “We might say, ‘Not these guys, they’re crooks’. You can’t do pure quantitative work.”

Once a company passes muster, he takes a significant position, preferring not to over-diversify and dilute the impact of a good stock with inferior ideas. The maximum number of holdings in Norrep funds is 35. Oliver avoids using future profit projections to justify the purchase of a stock.

“The stock must be worth owning for what it currently does and not for what it might do in the future,” he says. “We will, however, occasionally buy companies with good balance sheets and limited earnings where we can clearly document that the stock price is well below the value of its assets.”

Oliver was born in the mining community of Timmins, Ont., and his family later moved to Toronto where the young Oliver took on a Toronto Star paper route. Reading the paper as he walked his route gave him an interest in business news and led to the realization that there were opportunities to make money in the stock market. Also, tickets to the Royal Ontario Museum given by The Star to its paper carriers fostered an abiding fascination with historical artifacts.

Oliver has been actively involved with Calgary’s Glenbow Museum for many years, in both fund-raising and investment of the museum’s endowment funds. He is past chairman of the museum’s board and past president of its Acquisition Society. He also enjoys road trips on his Harley Davidson motorcycle.

Oliver’s first job after graduating with a degree in English and economics from Sir Wilfred Laurier University in Waterloo, Ont., in 1970 was managing real estate investments for Mutual Life of Canada in the Kitchener-Waterloo area. He later moved into stock market investments, shifting to the Mercantile Bank of Canada and, in 1978, joined Mu-Cana Investment Counselling Ltd., a Mutual Life subsidiary, with a mandate to move to Calgary and “open up the west.”

Oliver left to launch Hesperian in 1995, which originally focused on investment management for large private accounts, but he says the day-to-day contact with clients phoning to chat about their stock holdings and their personal lives was too distracting. Ultimately, he moved into fund management by taking over Norrep Fund, which had been launched earlier by a stockbroker and was floundering. “I couldn’t handle the rich, old ladies who called to talk about the corns on their feet,” he says of his private money-management days.

Norrep funds require a minimum investment of $10,000. The firm does no marketing or advertising, and most clients and advisors find their way to the products through word of mouth or their own research.

The average holding in Norrep mutual funds is $55,000, significantly higher than the average Canadian mutual fund account size of about $11,000.

“Our first concern is quality control,” says Oliver. “Some companies have been screwed to pieces by taking on too much, too fast. We would rather grow in a measured fashion, and build a high-calibre team of people, making sure we don’t outgrow our skill sets.”

Oliver prefers to keep his home base in Calgary where he won’t be influenced by the “Bay Street cult.” However, he has been gradually building a Toronto presence.

“Just as some of the best oil-and-gas deals are never seen east of Calgary, some of the best industrial and financial deals aren’t getting past Toronto, and as a national firm we don’t want to miss out,” Oliver says. “With one-third of the money in Canada within 200 miles of downtown Toronto, we thought it would be good to have exposure.” IE