Fund manager argues overlooked Canadian mid-caps now offer better odds than banks and big tech
Canadian pension money is crowding into pricey banks and oligopolies while cheaper, faster‑growing mid-caps are starved of capital.
According to BNN Bloomberg, Jerome Hass, partner at Lightwater Partners Ltd., says Canadian pension funds “largely don’t invest domestically,” which helps explain why many mid-caps remain under-owned even as the TSX is up 26.6 percent year-to-date.
He argues that Canada is “concentrating capital in oligopolies — banks, utilities, telecoms and grocery chains — rather than deploying capital more efficiently,” and warns that this ultimately drags on productivity.
For asset owners, that concentration shows up most clearly in the numbers.
Hass told BNN Bloomberg that Canadian banks are trading “near a 10-year high in terms of valuation.”
He notes that the banks are around 14 times earnings, while goeasy Financial sits at about six-and-a-half times next year’s earnings, even though goeasy is still expected to grow earnings by about 25 percent next year versus roughly seven percent for Royal Bank.
Six quarters ago, he says, the two traded at similar valuation multiples; now “the gap between them is the widest it’s ever been,” and he views goeasy as attractive at current levels.
Hass links that gap to the withdrawal of natural institutional buyers.
As per BNN Bloomberg, he says the “big six banks and their brokerage and wealth arms have largely stepped away from mid-cap and small-cap investing.”
Twenty years ago, investors could buy a quality mid-cap and wait for large institutions to “come in and re-rate it.” Today, he says, that buyer “often never shows up.”
For long-horizon pools such as pension and benefit plans, that absence can translate into a persistent valuation discount rather than a temporary mispricing.
At the index level, Hass remains cautious.
He told BNN Bloomberg that valuations in Toronto look “stretched by any standard.”
He points out that US tech “has also done very, very well over the last three years,” and says Lightwater is “not bullish on the tech sector, particularly US mega-cap tech.”
The firm runs a short position on the “Magnificent Seven,” arguing that “valuations and hype are extreme,” and that once heavy inflows ease, “we think they can continue to pull back to lower levels.”
He applies similar scepticism to gold and some AI‑linked power names.
With gold “up at $4,000 right now,” he asks, “do you really want to be putting money into gold stocks at these levels?”
According to BNN Bloomberg, he also questions the enthusiasm around Capital Power and TransAlta, saying that optimism about data centres in Alberta and “the cheapest gas in the world” may be “getting ahead of itself” given the capex required and his view that “Canada being Canada, nothing’s going to be built in a hurry here.”
Macro conditions sit in the background rather than drive his positioning.
Hass notes that markets are “largely flat” as investors wait for delayed US labour data following the government shutdown.
In Canada, inflation held at 2.2 percent, with core inflation below target. He says the Bank of Canada kept rates unchanged because it “remains concerned about inflation and didn’t see a reason to move early,” but argues that another “reasonable” reading increases the odds of rate cuts in 2026.
Within this environment, Hass is leaning into mid-caps with recurring cash flows, visible catalysts and discounted valuations.
He describes Descartes as “the Bloomberg of international trade and commerce,” telling BNN Bloomberg that “if you’re an airline, freight forwarder or trucking company, you essentially have to use Descartes’ software.”
What he likes most is the recurring revenue: a former CEO said that on day one of the quarter they know “about 90 percent” of revenue and “spend the rest of the quarter finding the remaining 10 percent.”
The shares were “taken to the woodshed” earlier this year on fears about artificial intelligence, Trump-era tariffs and trade, falling about 32 percent at the lows.
Third-quarter results showing seven percent organic growth “well above expectations” triggered a 14 percent jump and, in his view, reinforced the strength of the model.
For income-oriented mandates, Hass highlights DRI Healthcare Trust.
He says Canadian investors “love the royalty model in Franco-Nevada,” and DRI has “essentially apply[ed] that to the pharmaceutical and biotech space.”
According to BNN Bloomberg, DRI holds 26 or 27 royalties, trades at about six times EV/EBITDA, yields roughly three-and-a-half percent and “is growing at double digits.”
He also notes a track record of special year-end dividends and suggests investors who buy before year-end “might get lucky and get a special distribution again this year.”
