Announcer: The Small Cap Power Expert Interview featuring Alex Sasso.
Angela: Welcome back, Alex. For the benefit of our viewers, can you give us an introduction to your firm, as well as your role there?
Alex: Sure. My name is Alex Sasso. I’m CEO of Norrep Funds. I’m a member of the Canadian Equity Small Cap team. Our firm is about $1.3 billion in assets under management and we really like to specialize in different asset classes that are inefficient.
Angela: Well Alex, I understand that the Norrep Fund was the best performing mutual fund in Canada over 15 years, so congratulations.
Alex: Thank you.
Angela: What’s the secret of the fund’s success?
Alex: A lot of hard work. It’s a lot of hard work and a specialist team. So you really need a team of people that have experience, have the knowledge on how to manage small caps, and there’s so much more to it than that. Really what you need is a disciplined investment methodology and we’ve had the same methodology over those 15 years. Basically it’s a value approach to investing with a growth overlay.
And we really believe two disciplines are made better together and those two disciplines are quantitative analysis. Quantitative analysis is mathematical modeling. So we use mathematical modeling to help try to predict stock price movements and increase the mathematical probability of success. The bulk of the homework gets done on the fundamental side, and the fundamental side is where we get to know the company, the products, and the management team.
Angela: What advice do you have for investors looking to put together a small cap portfolio?
Alex: Good question. In the question, you have the answer. You really want a portfolio. You don’t want an individual company. So many people, when they think of investing in small caps, they go and they go buy one or two individual companies. Those tend to be risky in that so much can happen to a small company in a short period of time. Really what you want to do is I would recommend that they invest in a professionally-managed fund.
There, you’re getting somebody that understands valuations, you’re getting a team that does this all day, every day, and you’re getting a team that understands financial statements, they’re understanding the business, they’re understanding the products of the business, and like I said, this is what they do all day, every day.
Angela: Last time you were here, you mentioned two particular stocks, Intertape Polymer Group Inc. (TSX: ITP) and Linamar Corporation (TSX: LNR), both of which has performed very well since. Do you still hold these stocks?
Alex: Yeah, yeah. We may not hold it in the same percentage because we’re always buying and selling around the core position, but we still maintain the core position in both Intertape and Linamar. Both have done as expected. In fact, Linamar has actually outperformed our expectations. Backlog continues to be very strong and margins continue to be stronger than we expected.
So the auto sale cycle, Linamar does auto parts, mostly on the transmission side, but they have outperformed our expectations. Intertape Polymer has done well. Although their new what we call a super plant, which is a very large plant, they’re consolidating a bunch of plants into their South Carolina facility. Their new super plant has been a bit slower to come on stream than we expected, nevertheless it doesn’t change our thesis on the company.
Angela: What other stocks you like at this time and why do you think these names will do well?
Alex: A new name in the portfolio is a company called Air Canada (TSX: AC). Most Canadians are familiar with Air Canada. But the reason we added it was, there’s two real reasons we added it. One was a new disciplined cost management system and secondly the industry is being much more disciplined when it comes to capacity increases. So on the cost management system, we’re seeing the company take out significant cost. They just signed a new deal with Air Canada Jazz, which will save them 500 million over the next few years.
That’s a significant number. There are other things that they’re doing. They’re also adding revenues via a new revenue management system where they’re blocking out certain seats and maximizing pricing on certain seats. They’re also re-configuring some planes to increase capacity. There is, of course, the cost savings that we’re going to see from the fuel savings, the lower oil price. Those proceeds, that cash flow will then be put into reducing their debt, which of course, reduces your interest cost.
Lots of other things they’re doing, those are the big ones, but we think that the higher earnings will lead to a higher multiple on the stock. The second one would be a company named Canam Group Inc. (TSX: CAM). Canam, this is the power of a small cap investment. Not many people know Canam, but Canam is the largest manufacturer of steel components in North America and yet it’s classified as a small cap company. Almost 4,000 employees, 22 plants across North America, and again, it’s the largest manufacturer of steel components.
But we can buy that because it’s a small cap company. It’s growing. And really the reason we like that company was because in the last decade, they were doing 20% plus gross margins. Today they’re mid teens, yet they have record back log and we’re seeing their capacity utilization amongst their plants about to increase. So we think what’s going to happen is that margin is going to start to increase. And then of course higher margin means higher bottom line. Higher bottom line usually means higher stock price.
Angela: Alex, make a case for investing in small caps.
Alex: Small caps are unique in their ability to provide exponential change. A group of small cap companies can help dampen volatility. Our investment methodology at Norrep Funds is we put together a group of 30 to 40 really good quality businesses. Our top 10 make up half of the portfolio because we want those companies that we’re really excited about to have a meaningful impact on the unit holders. Now, that top 10 or those 30 or 40 companies, that’s from a sample set of almost 3,000 to 3,500 companies in Canada, significantly more than you could if you were a large cap manager and if you were trying to buy companies with a market cap greater than $3 billion, which is how we in the industry define large cap.
There are only 128 companies in Canada that have a market cap greater than $3 billion. So you have to be much more general in what you’re looking for. The beauty of small caps is we can be very specific in what we’re looking for. If there’s a particular industry that we’re after, if there’s a particular trend in the marketplace that we really want to take advantage of, likely we can do that with small caps. UBS recently put out a study saying that small caps over the past 25 years have outperformed and that was regardless of start date and regardless of end date and it happened not just in North America.
It happened in Europe and it happened in Asia. And what was interesting to us is that the volatility, the amount of risk you assume with the portfolio of small caps, in their study was only marginally greater than large caps, which ultimately means you’re getting better rates of return for almost the same amount for risk. You’re getting better risk adjusted rates of return among small caps.
Angela: Thanks again for today’s interview, Alex. Don’t forget to like us on Facebook, follow us on Twitter, and check out our YouTube channel for all other expert interviews.
