Resources drag on small caps

U.S. small caps are up 13% year-to-date, but Canadian small caps are down 8%.

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Looking back, domestic small caps grew 8% in 2013 but were then down 2% in 2014, says James Lawson, portfolio manager of Canadian equities at Picton Mahoney Asset Management, a sub-advisor of the Renaissance Canadian Growth Fund.

The continued dip is mainly due to our lagging resource sector, he adds, given around 42% of Canadian small caps are tied to the resource sector, whether that’s through energy or materials (basic and precious metals). And, currently, the resource sector is down 19%.

Read: U.S. equity funds outperform as energy drags Canadian funds

“Last year, [Canada’s] resource sectors were down 13%, while the non-resource sectors were up 8%,” says Lawson. “So [that’s] really coloured Canadian small-cap performance.”

When drilling down into resources, says Lawson, you’ll find:

• gold is down 10%;
• materials are down 17%;
• paper and forest products are down 21%;
• energy producers are down 26%; and
• energy-service companies are down 28%.

Read: Energy, copper could outperform in China

On the upside, one similarity between the U.S. and Canada is the best performing sectors across the board are healthcare (which is up 34% in Canada) and consumer staples (up 14%).

Tips for investors

When looking for small-cap opportunities in Canada, investors can look at the top companies in the space. Lawson says those include: consumer staples company Cott Corporation; Concordia and Merus Labs, both healthcare names; and industrial companies AirBoss and DIRTT Environmental. He finds Concordia leads the group at 117% appreciation, while Merus Labs takes the fifth spot at 53.2% growth.

Read:

• Where to turn as TSX heavyweights struggle
• 2 ways to invest in U.S. healthcare

“So there have been some strong performers in Canada, but they’ve been typically non-resource companies.”

Lawson notes, “If I look at the 20 worst small-cap performers in Canada, 18 of those are materials or energy companies,” and they’ve even affected companies in related sectors.

For example, if you look at Boardwalk REIT, “there’s a company which is all about apartment rental. But at the end of the day, a whole bunch of those apartments are in Calgary and Edmonton. So Boardwalk has been hit. […] Canada has taken a hit even during the last few years when markets have been strong, but particularly in 2015 year-to-date.”

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