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March 27, 2023

Commentary: NCM Small Companies Class

On March 27, 2023, Portfolio Manager Alex Sasso provided an update on NCM Small Companies Class including some impressive metrics and an update on two recent changes to the portfolio.


Hello, everybody. Today is March 27th, 2023, and my name is Alex Sasso and I'm the manager of the NCM Small Companies fund. NCM Small Companies fund is our small mid-cap growth fund. We believe small caps should be an important sleeve in all investors’ portfolios. And there's a few reasons for that.

One is they offer strong return potential. I always say a properly managed small cap fund can generate strong returns over a business cycle effectively by exploiting inefficiencies in the market that large caps just really can't do.

Two, I think they can provide alpha in what we call a beta market. So there are lots of mini blue chips, I call them mini blue chips that trade off of company specific fundamentals and company specific financials as opposed to macro themes, which large caps often trade off the macro themes. I prefer investing in a company that trades off those company specific attributes.

Three, very attractive valuations, and particularly now in the market currently, and I'll talk about this in a little bit, but the segment tends to trade at a better combination of value and growth. And so we're pretty excited about the opportunity small caps are presenting us today.

And number four, I would say it gives you access to the largest asset class in Canada by far. So in large cap Canada, you only have a handful of securities that you can choose from. In small cap Canada, you can be very specific to the segments of the economy that you want to be overweight in and small caps give us that opportunity.

And then five, of course, it provides pretty strong diversification for a client's portfolio.

So how has the fund changed since I last presented a couple of months ago? Well, we added a new oil and gas company. It's a company called Headwater Exploration. A one and a half billion oil and gas company that pays a nice hefty 6% dividend yield. And the objective for this company is, and it’s stated right in their presentation, is to continue adding incremental prospects through land acquisitions and through mergers and acquisitions.

So, you know, with this company, average daily production in 2023 is expected to be 18,000 barrels or BOEs per day at current strip. They've identified inventory that supports ten years plus of additional stable production, which gives us confidence in RLI, which is the reserve life indicator for the company. We expect them to generate about $280 million in funds from operations. They use about $100 million of that to pay for the dividend.

What we really like about it is some of the growth that's been inherent in this business for some time. Proven and probable reserves have increased 44% in calendar 2022, and they've replaced their existing reserves in calendar 22 by 324%. All of this to say that this is a growth company with an impressive track record and one of the best management teams in the business.

On other changes in the portfolio, we've reduced our position in ADF Group. It's a micro-cap company based out of Quebec that does very complicated steel structures. We felt it was time to reduce our weight in that company.

So, you know, looking ahead, I wanted to spend a little bit of time on how the portfolio was positioned. As you guys know, we spend a lot of time talking about the attributes, that gives you a lot of clarity about how we manage these funds and how they look relative to their benchmarks.

At NCM, we are not index huggers. We try to differentiate our portfolio, and that's most evident in the attributes. I'm just going to read some of the attributes to you. Trailing price earnings ratio, a measure of the valuation of the portfolio relative to its benchmark, it trades at 12.9 times, its benchmark is 17.7. So the BMO Small Cap Equity Index is the benchmark. It trades at a 17.7 trailing price earnings ratio.

Estimated PE, which is this current year PE, it's 11.1. And then the BMO Small Cap is 14.4 on a price to cash flow and estimated price to cash flow. The fund trades at an inexpensive 4.9 times cash flow versus the BMO Small cap bench at 5.8.

Okay. So now let's take a look at some of the profitability metrics in the fund. Our expected return on equity is 17.7%. It's a really healthy number. The BMO Small Cap Total Return Index expected return on equity is 10%. Return on equity is a nice measure of the profitability of the business. The return on invested capital of 16.1 for the fund versus 11.5 for the index.

Now what about earnings momentum? If we look at earnings surprise, we have an earnings surprise metric of plus 3.7 versus -0.3 for the benchmark. Estimate revisions are very attractive relative to the bench as well. Quarterly earnings momentum, again, very attractive relative to the bench, many times that of the bench.

Expected quarterly earnings momentum again, 4.5 versus -0.6. Free cash flow yield, one of my favorite metrics, is plus 7.6% versus just under 3% for the benchmark. And the dividend yield inherent in the fund is 2.25% versus just over 2% for the benchmark.

So you can see the quality of the portfolio, I would argue is a much higher quality portfolio than the benchmark.

So given that it's small cap, I often get questions about risk. I just want to spend a little bit of time talking about that because that's one of our differentiators is we really focus in on the quality of the businesses that we own.

We don't buy story stocks and we don't buy companies that have negative earnings of any kind either on the EBITA line or the cash flow line or on the earnings line. It's a very important safeguard for the fund.

And if you think about it, in the hundred down market months experienced since inception of the fund, which goes back to 2001 from a total of over 217 we've outperformed 74% of the time. So we tend to have difficulty keeping up in the really strong markets, but we tend to add quite a bit of value when on those down days. So on the up days, we don't necessarily keep up all the time. There are periods of time which we do, but really we add a good chunk of the value is on the days the markets are down and that's when we tend to add most of the value for the fund.

If anybody has any further questions, feel free to reach out to us at and thank you for listening to this short webcast on the NCM Small Companies fund.


The information in this video is current as of March 27, 2023 but is subject to change. The contents of this video (including facts, opinions, descriptions of or references to, products or securities) are for informational purposes only and are not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that regard. The communication may contain forward-looking statements which are not guarantees of future performance. Forward-looking statements involve inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.



Alex Sasso, CFA

Chief Executive Officer and Portfolio Manager of NCM Small Companies Class and NCM Income Growth Class.