The National Bank Quebec Growth Fund is a consistent winner, with top quartile performance over 1-, 3-, 5- and 10-year time frames through June 30, 2015 and the second-best 10-year annualized return (12.5%) in the Canadian small/mid-cap category. It’s also unlike most other Canadian equity funds, making it an attractive uncorrelated component for investors seeking diversification without the economic, political, or currency risks of a foreign market.
Exactly as its name implies, the Quebec Growth Fund invests only in companies with a strong provincial presence, and while it’s categorized as a small/mid-cap fund, about one third of its holdings are large-caps. “We have the luxury of picking from all the small, medium and large-cap companies that are available to us,” says Marc Lecavalier, vice-president and portfolio manager at Fiera Capital Corp. in Montreal.
The fund mandate, however, is to buy only companies with head offices in Quebec, or with a substantial part of their operations or sales in the province. Because this limits the field to some 125 companies, the players are all familiar. “We could screen those names, but we know most of them well, because we meet often with their management teams,” says Lecavalier.
“We try to find the best growth opportunities, with a lot of focus on organic growth as well as growth through acquisitions,” Lecavalier explains, but adds that price is also important. “We look for good value, and when we find good companies we stick with them. We’re not traders. We’re long-term investors with more than a five-year horizon.”
By way of an example of a good company, Lecavalier cites top-10 holding Stella-Jones Inc. (TSX: SJ), a Saint-Laurent, Quebec-based manufacturer of pressure treated wood products with 27 facilities spread across 16 U.S. states and five Canadian provinces, and with 2014 sales of $1.25 billion. “They’re growing in good markets, and they’re also doing M&A, with a good management team and clear growth strategies,” he says. “Companies like this are not usually found in other funds.”
Systematic accumulation strategy
As for building positions, Lecavalier takes a systematic approach. “We’ll start with one percent [of total assets],” he says, “and if it goes in the direction we want, and if it beats our expectations, we will increase our position. But we don’t average down, because having to do that shows something is wrong. We try to invest in companies that do better than average, then keep them for the long term.”
The big difference between this fund and most “Canadian” funds, however, lies in the unique character of Quebec business. “The key difference is that Quebec doesn’t have a big resource base,” says Lecavalier. “Canadian funds usually hold the big banks, energy, and telcos – those are the big sectors in Canada,” says Lecavalier. “But Quebec doesn’t have resources or big banks. Quebec is more tilted towards the U.S. economy than Canada because it has a lot of exports to the U.S., so in general we track U.S. returns more closely than normal Canadian funds.”
Indeed, the fund’s overall non-correlation to Canada-wide events, such as the recent collapse in oil prices, as well as the continuing recovery of the U.S. economy, is starkly evident in one-year returns through June, when the Quebec Growth Fund gained 16.0% while the average Canadian small/mid-cap fund lost 5.7%. “Our fund is relatively small [about $70 million in assets], but it is a great alternative to what you usually find in the Canadian index, LeCavalier concludes