For Subscribers

Get the complete article now!

TWST: How do you structure the Fund? How many stocks do you generally want to own?

Mr. Henderson: I generally want to hold between 20 and 25 stocks in the Fund. There is a balance to be maintained between diversification to reduce risk and being able to have a meaningful weighting in the stocks that you do own that allows their movement to have a significant impact on your performance. In addition, I prefer to own a smaller number of companies that we know extremely well and that we are confident in, rather than a larger portfolio whose attributes are less apparent to us.

TWST: Do you have core positions in the portfolio?

Mr. Henderson: At the moment my weightings are approximately equal. There are 21 stocks in the portfolio, and their weightings are within 60 basis points of one another.

TWST: Perhaps you can tell us about some of the interesting smaller companies that don’t get too much attention from investors, and why you own them.

Mr. Henderson: The first company I’d like to talk about is Linamar Corporation (Toronto:LNR.TO), which produces power train components for auto manufacturers. We own this stock for a number of reasons. Linamar’s historical performance has been mixed: after strong performance in 1997 it had well-publicised problems last year and saw its stock price suffer as a result. Ordinarily that’s not a profile that we’d have any special interest in, but in this case we feel that the reversal in its valuation was overdone, and that management is making progress toward overcoming the obstacles it came up against last year. One of the problems that the company experienced was in terms of its management structure and internal communications, which has now been resolved. The expense associated with the company’s capacity build-up is being paid down as production increases. In addition to seeing greater efficiency from top-down improvements in production, management has also implemented a series of measures to control and reduce costs, both of which clearly improve efficiency and return on capital. We feel the company is very well-positioned to benefit from the trend toward outsourcing that we’re seeing across the sector; the potential exists for up to 16 billion to be outsourced over the next five years, and capturing even a portion of this potential would represent significant top-line growth for Linamar. The company reported quarterly results last week that beat expectations by a considerable margin, and so far we’ve seen a good return on our initial investment.

TWST: Any risks associated with Linamar?

Mr. Henderson: The auto sector is generally considered a cyclical industry, and so there are the risks associated with a slowdown in economic growth. However, one of Linamar’s positive features is that it tends to generate fairly long-term orders, which implies a greater degree of visibility in terms of revenue flows. In any turnaround situation the risk that management won’t be able to execute their strategy is a major factor to consider; however, so far the indications we’ve seen are that the firm’s managers are on top of the various issues they’re facing and we’re very positive on their ability to follow through.