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What are we looking for?

What the pros who run small-cap mutual funds are buying.

Checking out the top holdings is a good way to get investment ideas, or to research a fund before investing in it. Today, we look at Dynamic Small Business Fund at

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More about the fund

The $563.7-million Canadian small-to-mid-cap equity fund is co-managed by Oscar Belaiche and Jason Gibbs of GCIC Ltd. Some resource picks also come from colleagues. The fund posted a 4.9-per-cent gain for the year ended Jan. 31 versus an 8.4-per-cent loss for the S&P/TSX Total Return Index. Over 10 years, the fund has posted an annualized 14.5-per-cent return.

The team, which focuses on companies with strong management and can generate significant free cash flow, concentrates on the real estate, infrastructure, energy and materials sectors. Cash is a "defensive tool," and rose as high as 40 to 45 per cent in the 2008-09 downturn, Mr. Belaiche said. The current 17-per-cent cash position stems from new money and is not a defensive move.

"We are positive on the market now," Mr. Belaiche said. The European Central Bank's decision to make cheap loans to Europe's banks (known as long-term refinancing operation or LTRO) since December has minimized risk of a systemic bank collapse, he noted.

What did we find?

Four stocks sporting robust one-year, double-digit returns. Black Diamond Group Ltd., a provider of remote workforce housing and energy-related services, led the way with a 79-per-cent gain.

Morneau Shepell Inc., a human resources consultancy hired by major businesses every year, still has more upside, suggested Mr. Gibbs, the fund's co-manager. "It's a stable, defensive business with a great management team," and comes with a 7-per-cent dividend yield, he said.

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He is also upbeat on Innergex Renewable Energy Inc., an operator of hydro and wind power plants. The stock is attractive because of its dividend yield of 5.6 per cent, and recurring income from contracts lasting about 20 years with government-related entities.

The team also likes Canexus Corp., a low-cost producer of sodium chlorate used in bleaching pulp, because of the growing demand for this chemical in North America and emerging markets. The company also produces hydrochloric acid used for hydraulic fracturing to force oil and gas from shale-rock formations. Its stock has a dividend yield of 7 per cent.

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