Martin Ferguson is the small-cap king of Canada. That said, he’s surprisingly humble about it. Martin’s New Canada Fund has achieved a 13.7% compound annual return over a 10-year period, and an annualized 15-year return of 16.5% compared with the median 10.7% return in the Canadian Small-/Mid-Cap Equity category as tracked by Morningstar. In 2013, the New Canada Fund posted an impressive return net of fees of 49.4%. Assets under Martin’s superb management are above $1 billion.
Surprisingly, though, Martin still didn’t feel worthy of being interviewed. He assumed Jason Donville recommended him to me to be interviewed, but I had known about Martin’s exceptional market performance for years. “I would be pleased to talk to you and answer your questions, if only to determine if I am ‘Master’ material. I value Jason’s opinion on many investment topics but his recommendation [of including me in your book] may be beyond his area of genius,” said Martin.
I responded almost immediately with this list of why I had independently, and irrefutably, included Martin in the Market Masters roster:
Thankfully, Martin finally agreed to be featured in this book. Although his process for picking small-cap stocks is not necessarily unique, it is rigid and scientific and thus not easy to implement on the first go. For example, we discussed the significance of internal cost of capital. Martin primarily employs the return on invested capital or ROIC metric to valuate stocks, and will favour companies where ROIC is greater than their internal cost of capital. From there he overlays various other models, admittedly more advanced and again increasingly difficult to implement for the beginner investor. The formulas we discussed may seem complex at first. But my recommendation is to work through those formulas with actual stocks (for example, try them with Bell Canada). As the saying goes, practice makes perfect.
During the interview, I asked Martin to compare and contrast his approach to Jason Donville’s preferred ROE (return on equity) valuation method. His reply is food for thought. Finally, you’ll learn that Martin has a golden touch that transforms not only his small-cap stocks into winners, but also his entry-level employees into top performers.
Bubble: an unsustainable event that usually occurs at the end of a “boom,” marked by an equally huge, but opposite, move (a decline or “bubble burst”) in the stock market that can wipe out previous gains (for example the 2000 tech bust).
Consolidation: companies within a sector (e.g., health care) that merge to create a smaller number of larger companies or volume that builds at or around a particular price point in a stock and determines its technical support.
Diversification: the allocation of money into unique investments with the intent to reduce risk in your portfolio (e.g., to invest in stocks and bonds so that you are protected if bonds go down but stocks go up).
Dividend Discount Model: the calculation by which investors determine the price of a stock by discounting dividends back to present value.
Return on Invested Capital (ROIC): a measure of a company’s ability to invest and use its money to generate incremental returns for its shareholders (including long-term debt).
Risk-Free Rate: the return from a relatively conservative investment, such as a GIC.
Risk Premium: the return over and above the risk-free rate, which an investor can achieve in the equity market.