The Holland Bloorview Investor Challenge puts the professional skills of three investment pros to work for Holland Bloorview Kids Rehabilitation Hospital.
A trio of Canadian money managers had a higher motivator in trying to navigate the commodity crash last quarter.
The three are participants in the 2016 Holland Bloorview Investor Challenge to raise money for the Holland Bloorview Kids Rehabilitation Hospital, which is the largest facility of its kind in Canada.
The Toronto hospital's purpose is to improve the lives of children living with disabilities – everything from cerebral palsy to autism.
In support of that mission, three fund managers each started with $25,000 donated by their respective firms. Each will manage that money on behalf of Holland Bloorview over the course of the 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.
Here is how each money manager invested the money, and how they fared over a lively first quarter:
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The manager: Bryan Pilsworth, president and portfolio manager, Foyston Gordon & Payne
The fund: FGP Canadian Equity Fund
At the end of what was a tough year for Canadian equity investors, Mr. Pilsworth said he saw the opportunity to increase exposure to two of the least-favoured sectors at the time – energy and financials.
He maintained overweight positions in each throughout the first quarter. "Those are the two areas where there is value right now," he said.
While the crude-oil free fall gained velocity through the first half of the quarter, investor sentiment toward the space improved since the bottom was hit in February.
"We're of the view that oil prices will recover as demand continues to chug along globally and supply starts to roll off," Mr. Pilsworth said.
The fund has focused its energy exposure on large integrated names, such as Imperial Oil Ltd. "It's a phenomenally well-run company; it's got the highest return on equity in the sector. And it has organic growth, which is rare to find right now," he said.
Just as the sell-off in Canadian energy was overdone, so was the negativity toward Canadian financials over loan exposure to the oil patch, he said.
"No doubt, credit losses will be going up. But they'll go up modestly."
The fund was up by 5.7 per cent on the quarter, without accounting for investment management fees, as this is not a public mutual fund.
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The manager: Stephen Carlin, managing director and head of equities at CIBC Asset Management
The fund: Renaissance Canadian Dividend Fund
In addition to maximizing yield, this fund is focused on dividend sustainability, Mr. Carlin said. And the latter was an attribute that resource names did not look poised to offer going into the first quarter.
Although dividend yields were high in the energy and materials sectors, collapsing prices threatened many of the riskier dividends.
"We were exiting positions in companies where we felt there was risk on the dividend," Mr. Carlin said. "And many, many companies were forced to cut."
But in a market such as Canada, in which energy and mining companies claim an outsized share, replacing that lost dividend exposure can be a challenge.
"My dividend yield came back down a lot closer to the market, so I'm relying more on capital appreciation," he said.
He reduced his energy exposure to higher-quality dividend payers, such as Imperial Oil, Suncor Energy Inc., and Canadian Natural Resources Ltd.
He maintained a high-conviction view on Canadian financials, particularly life-insurance companies.
And he increased the fund's weighting in the consumer sector, through companies such as Alimentation Couche-Tard Inc., and Gildan Activewear Inc.
Renaissance was up by 3.7 per cent in the first quarter.
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The manager: Barry Allan, president and chief investment officer, Marret Asset Management
The fund: Marret Tactical Energy Fund
Last December, Mr. Allan decided to launch a fund tailor-made to profit from the energy crash.
Historically, corrections in the high-yield space tend to be concentrated in one or two industries, he said. In the 1980s, it was real estate; in the 1990s, it was telecoms; in the 2000s, it was auto manufacturers and financial services; and this time, the focus is on materials and energy.
"And in every cycle, the market has consistently overestimated defaults in the industries where defaults are concentrated," he said. "I think that is playing out again."
In early February, when oil bottomed, the market was pricing in the default of about 80 per cent of high-yield energy debt, Mr. Allan explained. He said he believed that rate was more likely to be 30 per cent to 35 per cent. So he built a concentrated portfolio of high-yield bonds at the higher end and middle of the quality range, for which the market might be miscalculating the risk of default.
After sliding, then rebounding, the fund was down by 0.8 per cent on the quarter. "No question, this is a volatile fund," Mr. Allan said.
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TOP HOLDINGS
Here are the top fund holdings of the three managers participating in the 2016 Holland Bloorview Investor Challenge.
Bryan Pilsworth (Foyston Gordon & Payne)
- Bank of Nova Scotia
- Royal Bank of Canada
- Suncor Energy
- Toronto-Dominion Bank
- CIBC
(as of Feb. 29)
Stephen Carlin (CIBC Asset Management)
Renaissance Canadian Dividend Fund
- Royal Bank of Canada
- Toronto-Dominion Bank
- Manulife Financial
- Canadian National Railway
- Bank of Nova Scotia
(as of March 31)
Barry Allan (Marret Asset Management)
Marret Tactical Energy Fund
High-yield bonds of:
- Meg Energy
- Precision Drilling
- Range Resources
(as of March 31)
Tim Shufelt