Resolute Growth's Stanley bows out on a high note

When he pulls the plug on Resolute Growth four months from now, Tom Stanley will close the books on one of the fund industry's most remarkable track records. Stanley's Toronto-based boutique, Resolute Funds Ltd., confirmed on Jan 24 that it would terminate the fund on June 2.

Over the 12 years since it opened for business in December 1993, Stanley's concentrated portfolio of mainly Canadian small-cap stocks has been a veritable money machine.

Since inception, the fund has returned a compound annual 27.7% to December 2005, compared with 2.2% for the median Canadian Small Cap Equity mutual fund and 2.3% for the BMO Nesbitt Burns Small Cap Index (Weighted) over the same period. The 10-year return is 33.1%, the highest by far of any fund in any category in the entire Morningstar Canada database.

The fund has a high standard deviation of returns, but very much skewed to the upside. Its best 12-month return, achieved in the period ended August 2005, was 139.4%. Its worst loss, for the 12 months ended in June 1997, was a comparatively low 17.7%.

While the long-term numbers look great, the recent results are even better. Stanley is exiting on a high note, even by his ambitious standards. The fund's performance in the 2005 calendar year, which turns out to be its last, will also be its best. It doubled investors' money, with a 12-month return of 100.5%.

Stanley's decision to get out of the retail fund business is in response to new securities regulations last year that compel mutual funds that are offered by prospectus to provide quarterly reports of their holdings.

Preferring to keep his cards close to his vest, Stanley noted that the provision requiring managers to report their top 25 holdings would effectively require him to disclose his entire portfolio every three months.

According to Stanley, full quarterly disclosure would hinder his ability to accumulate or unload the thinly traded securities that he often favours, and this would be to the detriment of his investors.

Stricter disclosure provisions were only one of a number of grievances that Stanley had with regulators. In a Jan. 24 letter to unitholders, Stanley said "we have been facing ever increasing regulatory expenses, detrimental disclosure requirements, rising liability risks and increasing red tape."

Stanley says he offered to regulators to keep the fund closed "forever" so that no new investors would be affected. The fund has been closed to new investors since Oct. 22, 2004, and the cap was extended to existing investors as of Aug. 31 of last year.

Stanley also told regulators he would be willing to waive deferred sales charges for any existing investors who wanted to opt out, so that only investors who were willing to go along with the exemption would remain.

Furthermore, in a vote held on June 20, investors holding 99.6% of fund units backed Stanley's request for special treatment. "In spite of all of this we failed to persuade the regulators," Stanley said.

Resolute Growth's holdings will be liquidated before the termination date, and Stanley anticipates no difficulty. "We have significant cash holdings and many of our stocks are very liquid," he told unitholders.

Stanley also has an exit strategy in place for securities that it may not be advantageous to sell on the open market before June 2. He says he has received permission from regulators to sell some of the fund's securities, at their fair market values, to Resolute Performance, the other fund that he manages.

Launched in June 2005, Resolute Performance is a fund in the Specialty/Miscellaneous category whose assets totalled $313.8 million at the end of December. By the third week of January, the fund had grown to more than $440 million.

It is similar in investment style to Resolute Growth, and will commonly be heavily overweighted in one or more industry sectors. But it is not subject to the 10% limit per stock, based on book value of fund assets.

Resolute Performance continues to be offered on a limited basis through selected brokers to qualified investors, subject to a minimum initial investment of $150,000. Since the fund is sold by offering memorandum, it is not subject to the quarterly disclosure requirements for mutual funds under National Instrument 81-106.

Another difference is that Resolute Performance's management expense ratio of 3% is higher than that the 2.68% MER currently reported for Resolute Growth. The MER gap between the two funds isn't huge, and Resolute Performance does not have any performance-based fees in place, so higher fees weren't the driving force behind the decision to terminate Resolute Growth.

Of greater significance for Stanley, along with his unwillingness to play ball with the regulators, were lifestyle considerations. "When one gets into their 50s," he told unitholders, "thoughts of retirement get stronger."

Stanley, now in his early 50s, said he hoped to use the "sunset years" of his career to manage the private fund, Resolute Performance, for a limited number of investors.