Hedge funds and wealth managers had one of their best years of returns in a decade in 2020 but some of those top performers were recipients of the Canada Emergency Wage Subsidy, a federal program intended to pick up the payroll tab of businesses that had taken a revenue hit during the pandemic.
Through names obtained from the Portfolio Management Association of Canada and the Investment Industry Association of Canada in concert with data from financial intelligence companies Preqin and Fundata, and the federal database of CEWS recipients, The Globe and Mail identified at least 80 asset managers that received the subsidy from a list of almost 300 names.
Beyond a handful of hedge funds, some of the largest wealth managers in the country – household names such as Franklin Templeton, CI Financial and Gluskin Sheff & Associates – collected CEWS. Collectively, these three companies manage close to $110-billion of assets in Canada.
That some of the highest earners in the country, whose companies have performed exceptionally despite the pandemic, saw their wages bankrolled in part by taxpayers raises important questions about the design of the program.
The Scotiabank Canadian Hedge Fund Index, which measures the monthly performance of Canadian-domiciled hedge funds with assets-under-management of at least $15-million, shows an average return of 11 per cent in 2020, the best year for the industry in a decade.
While most of the hundreds of asset managers analyzed by The Globe are private companies, making it impossible to determine the extent to which they charted a decline in revenue over the pandemic, they often make their fund returns public to attract new investors. And revenue for these kinds of businesses is almost entirely tied to how well a fund performs.
Timelo Investment Management Inc., for example, a CEWS recipient, saw one of its funds – Timelo Strategic Opportunities Fund – post returns of almost 30 per cent in 2020, outperforming the S&P/TSX Composite Index by more than 10 times. Its founder and portfolio manager Jean-François Tardif told Bloomberg News in a January interview that the company had taken advantage of market turbulence in the early days of the pandemic and has since positioned itself to gain from a postpandemic recovery.
Another CEWS recipient was the hedge fund JM Fund Management Inc. – its JM Catalyst Fund had such a good 2020, with outsized returns not seen by the fund since 2016, that it was ranked as the third-best-performing hedge fund at the 2020 Canadian Hedge Fund Awards.
A Globe investigation into the number of Canadian publicly listed companies that obtained CEWS, and how much they got, found that a large minority of 400-odd companies that received the subsidy saw their profits grow in the second and third quarters of 2020, even as the country experienced the worst recession since the Great Depression. In fact, for many, the hit to their revenues was essentially fleeting – a brief decline when the country was subsumed in the first wave of the pandemic, and then business as usual. This pattern appeared also to be the case with many hedge funds and wealth managers that claimed the subsidy.
“We have to remember that in spirit at least, this program was constructed with the sole purpose of deterring companies from laying off workers. But as it rolled out, it became easier to access, in part because businesses wanted it to be easier to access,” said David Macdonald, senior economist with the Canadian Centre for Policy Alternatives.
The first iteration of the program, called the Temporary Wage Subsidy for Employers, targeted subsidies to small businesses, covering up to 10 per cent of their payroll. It received swift condemnation, particularly from small business groups that argued the 10-per-cent cap was insufficient in preventing layoffs. CEWS was subsequently born, covering up to 75 per cent of employees’ salaries, with a weekly limit of $847 per worker. Initially, companies had to show a revenue decline of 30 per cent to qualify, but within months, that criteria was loosened to allow claimants that experienced smaller revenue declines to collect proportionally smaller subsidies.
To date, the federal government has doled out more than $77-billion in CEWS to approximately 443,000 companies, making it one of the largest relief programs in the country’s history. Its size is linked to the fact that the program does not discriminate against companies that reported declining revenues for reasons other than the pandemic, or, like the hedge funds, that ended up performing well throughout the course of the year despite one or two quarters of poor performance.
For example, public filings show that CI Financial suffered a revenue drop of almost 5 per cent between the first and second quarters of the 2020 calendar year, when the first wave of the pandemic was at its peak.
But it spent the subsequent two quarters more than making up for its losses, with revenue climbing by approximately 19 per cent from the end of June to the end of December, 2020. In fact, the company embarked on a massive spending spree last year, acquiring 14 U.S. wealth management businesses while doling out dividends to shareholders. CI Financial did not disclose how much CEWS it received.
A similar revenue trajectory could be observed in the 2020 performance of Montreal-based Fiera Capital Corporation, also a CEWS recipient. The company, which has about $180-billion in assets under management, saw its revenue dip slightly between March and June, 2020, but then pick back up. Fiera collected $2.9-million in CEWS, according to filings. It continued paying out dividends to shareholders and bonuses to executives, which totalled over $100-million in 2020.
One asset manager even launched a new venture capital fund at the end of 2020, after a year of positive growth. PenderFund Capital Management Ltd., which has about $1.5-billion in assets under management, announced the creation of Pender Ventures in November, 2020, a $100-million tech fund that has made five investments so far. One of the firm’s most prominent funds, Pender Growth Fund, recorded a 40-per-cent return between last April and this April.
Because most of the asset managers identified by The Globe as CEWS recipients were private companies, it is unclear how much the federal government has spent subsidizing the asset management sector during the pandemic. The Globe did, however, reach out to 11 private asset managers that it identified as having performed well during the pandemic, including Timelo, JM Fund and PenderFund, to ask how much they received in CEWS.
Only one, Toronto-based Agilith Capital Inc., whose flagship North American Diversified Fund recorded its best year since 2017, responded, saying that CEWS “did help preserve jobs during the worst of the pandemic.” It declined to disclose the amount received.
In a recent interview on BNN Bloomberg, Mr. Tardif, the Montreal-based hedge fund manager and CEWS recipient, took aim at the “millions” of individuals collecting unemployment cheques from the government, suggesting that this group of people were responsible for wild trading swings on the market and a surge of speculative money.
“The number of accounts being opened by day traders, it’s all those people at home getting cheques from the government … in some cases they are getting more money than what their paycheque was … and they go trade,” he said.
Mr. Macdonald isn’t surprised by the disdain displayed by some of the wealthiest individuals toward beneficiaries of government aid.
“CEOs are perfectly happy to pontificate about whether low-income people or the unemployed should obtain support. On the other hand, they are also perfectly happy to take public money when offered,” he said.
There has been some change to CEWS since the program launched. In April’s budget, the government announced a clawback provision that would reduce CEWS payments to companies that increased their executive compensation in 2021 from 2019. But it’s insufficient, Mr. Macdonald believes.
“It is time for the government to go to these businesses and say, ‘Hey, turns out you did not need that public support, it’s time for you to pay it back.’ ”
With a report from Patrick Brethour