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The fourth quarter saw the rotation out of defensives and bond proxies and into cyclicals accelerate after the election victory of Donald Trump, making for favourable market conditions for a trio of fund managers trying to make money for a good cause.

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The fourth quarter saw the rotation out of defensives and bond proxies and into cyclicals accelerate after the election victory of Donald Trump, making for favourable market conditions for a trio of fund managers trying to make money for a good cause.

The three are participants in an investment challenge to raise money for the Holland Bloorview Kids Rehabilitation Hospital in Toronto – the largest facility of its kind in Canada. Its aim is to improve the lives of children living with disabilities.

In support of that mission, three fund managers each started with $25,000 donated by their respective firms.

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Each managed that money on behalf of Holland Bloorview over the course of the 2016 calendar year, with all capital and investment gains going to the hospital. Additional donations of cash or securities can be made to each manager's Investor Challenge fund at hollandbloorview.ca/investorchallenge.

A new slate of portfolio managers is taking over for the 2017 instalment of the challenge: Brendan Caldwell, president and chief executive, Caldwell Investment Management; Wesley Roitman, managing partner, Romspen Investment Corp.; and Brandon Snow, chief investment officer, Cambridge Global Asset Management.

As for the final quarter of 2016, here is how each money manager fared.

The manager: Bryan Pilsworth, president and portfolio manager, Foyston, Gordon & Payne

The fund: FGP Canadian Equity Fund

Those investors who favoured growth-oriented over dividend stocks probably ended 2016 on a positive note – such was the case for Mr. Pilsworth's fund. "Everything worked for our fund in the quarter."

In fact, he started the year preferring cyclicals and stocks positively exposed to rising rates, while tilting away from higher-yield stocks.

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"We went into sectors that were thoroughly unloved. You have to position yourself before the euphoria comes," he said.

His thesis began to unfold in the second half of the year as U.S. economic readings improved, and gained momentum after the U.S. election, as the market warmed to Mr. Trump's pro-growth agenda.

Strong sector returns, in fact, over the course of 2016 caused him to lighten up on exposure to materials, energy and financials, Mr. Pilsworth said.

The fund posted third-quarter total returns of 10.3 per cent, lifting returns on the calendar year to 28 per cent.

The manager: Barry Allan, president and chief investment officer, Marret Asset Management

The fund: Marret Tactical Energy Fund

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By the end of November, Mr. Allan's original thesis focused on how high-yield energy debt had played out and the fund had captured all of the upside he envisioned. "We sold everything and returned capital to everybody," Mr. Allan said.

His final return for the fund from the start of 2016 was 21 per cent.

"We thought 20 to 25 per cent was possible, as long as oil didn't go down from where we started," he said.

In fact, the price of oil ended (at the end of November when he wrapped up the fund) up pretty much where it was when the fund started out – between $40 (U.S.) and $45 a barrel.

What changed was the market's perception regarding the default rate of high-yield energy bonds.

At the worst of the oil crash, the market was pricing in the default of up to 80 per cent of high-yield energy debt, Mr. Allan said. That would have required crude oil prices below $30 a barrel for around three years, which he thought unlikely.

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"We identified an undervalued and oversold area of the market," he said.

"Then we sold everything and returned to the safety of a cash substitute while we're looking for the next thing."

The manager: Stephen Carlin, managing director and head of equities at CIBC Asset Management

The fund: Renaissance Canadian Dividend Fund

Life insurance stocks can provide a nice counterbalance to rate sensitivity in a dividend portfolio, and that certainly held true in the fourth quarter.

Upward pressure on longer-term interest rates gained momentum in the fourth quarter, which included both the U.S. election and rate hike by the Federal Reserve.

"The combination of those two things certainly changed the interest rate curve, which changed the outlook for a number of companies in the financial services sector," Mr. Carlin said.

Rising rates are not just positive for bank profitability, but also for lifecos, which derive some of their profits from reinvesting premiums.

In the fourth quarter, insurance stocks within the S&P/TSX composite index rose by 20 per cent, while Manulife Financial Corp., which is a top holding in the fund, rose by close to 30 per cent.

Those price moves helped lift this fund's total returns to 5 per cent on the quarter, and 17 per cent for all of 2016.

Alyssa Gowing is a 27-year-old homeowner who follows a strict budget and finds creative ways to save money in order to afford her mortgage
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