Stay True to Your Stripes: Growth Manager
How this manager’s maintained a gold-rated Canadian small-cap mandate amidst macro headwinds.
In a challenging environment for growth stocks, small/mid-cap specialist, Nicolas Chevalier, credits multiple risk management for the track record of the gold-rated Pembroke Canadian Growth mandate.
“In the shorter term,” says Chevalier, “there are headwinds, no doubt about it. A lot of our companies are struggling with rising commodity and oil prices, inflation, labour shortages, and other challenges, but we will not change our stripes. Our approach has always been to invest in high-quality companies and understanding the challenges.”
Chevalier, a partner and portfolio manager at Pembroke Management Ltd. in Montreal, co-manages the portfolio with Stephen Hui, located in Vancouver.
Protective Measures
Embedded in the risk measures is an emphasis on qualitative research supported by quantitative modelling data. “Ultimately,” says Chevalier, “you want to back management teams that have secular tailwinds and the skills to take on the opportunities in a rapidly changing world. That challenging world is where the right people with the right opportunities can make hay and grow, so disruption is a good thing.”
As bottom-up investors, their portfolio is primarily weighted in sectors with the greatest growth potential. The portfolio is currently weighted in approximately 22% industrials, 21% technology, 16% financials, and 14% consumer discretionary. Also currently, the fund has zero exposure in utilities and healthcare, but there is healthcare exposure within the other sectors of the mandate.
Also part of the risk strategy is being pretty strict about never allowing a single sector to represent more than 30% of the Index. From an individual stock perspective, the portfolio of 40 to 50 holdings will not exceed more than a 7% weighting.
With a long-term philosophy, the managers look for companies with a five-year time horizon. Historically, the fund has an annual portfolio turnover of approximately 30%.
When it comes to capitalization in the small and mid-cap growth space, the initial investment strategy targets a potential company with a market cap of around $200 million to $3 billion. “I would say the sweet spot is just under $1 billion,” says Chevalier.
Favoured Growth Stocks
A favoured long-term holding is Tecsys (TCS), a Montreal-based company that provides software for multiple supply chain distribution, including the healthcare and retail sectors. “Essentially they’re installing management software systems for improved inventory management,” says Chevalier. “On the healthcare side, Covid really put the spotlight on some of the inefficiencies in the systems with personal protective equipment, ventilators and masks in a crisis situation.”
Tecsys is the leading player in the space with “a decades-long runway and a very very sticky customer base.” Tailwinds also bode well for the distribution side of the business in an increasingly complex world of selling online and the supply chain operations. In addition, the family are huge owners of the stock, so they are long-term shareholders along with Pembroke.