The gradual rebalancing of the global energy market gained a foothold in the second quarter, presenting opportunities for a trio of fund managers to make some money for a good cause.
The three are participants in an investment 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.
The second quarter, like the first, was strongly influenced by the energy market, at least until Britain caught investors off-guard by voting to leave the European Union in the dying days of the quarter.
Here is how each money manager fared.
The manager: Stephen Carlin, managing director and head of equities at CIBC Asset Management
The fund: Renaissance Canadian Dividend Fund
The aftermath of one of the worst energy corrections on record saw a number of Canadian companies bound to unsustainable dividend payouts.
Cutting much of that energy exposure was key to sidestepping the rash of dividend cuts that followed.
Then, as the oil market appeared to have established a bottom, some of those same names looked attractive again, Mr. Carlin said: "Following all of those dividend cuts, we felt a number of companies had rebalanced their business models to better reflect the lower commodity price environment."
He added back shares of Crescent Point Energy Corp., for example, which cut its dividend by 70 per cent in March.
Meanwhile, Mr. Carlin said he maintained exposure to other pockets of the Canadian equity space dragged down peripherally by the energy correction.
He did not cut the fund's pipeline positions. "We felt there was visible and sustainable growth," he said.
And he stuck to a high-conviction view on Canadian financials, particularly life insurance stocks.
Any chance of Canadian lifecos posting decent returns on the quarter were dashed in late June, however.
"They had continued to climb that wall of worry, until Brexit came around," Mr. Carlin said. Fading expectations for rising interest rates weighed on lifeco valuations.
Mr. Carlin said he remains overweight the sector.
The fund was up by 1.7 per cent in the second quarter, after fees.
The manager: Barry Allan, president and chief investment officer, Marret Asset Management
The fund: Marret Tactical Energy Fund
The idea behind this fund, which was specifically designed to profit from the energy crash, proved its worth with striking speed in the second quarter.
As the price of oil rose through most of the quarter, expectations of debt defaults in the high-yield energy space came down from extraordinary highs. As such, this fund generated returns in excess of 15 per cent after fees during that period.
"That's an awful lot for a bond fund," Mr. Allan said. "I don't think it's possible to have another quarter like that."
Based on the belief that the market was overestimating the rate of default in the energy sector, Mr. Allan built a concentrated portfolio of high-yield bonds at the higher end and middle of the quality range.
In the depths of the energy sell-off, the market was pricing in the default of about 80 per cent of high-yield energy debt, Mr. Allan estimates.
As the market stabilized and the price of oil nearly doubled from trough to peak, settling in the range of $45 (U.S.) to $50 a barrel, the expected default rate fell by about half.
Several of the bonds held in this fund clawed back a great deal of lost value as a result. That has prompted Mr. Allan to rebalance by reducing some higher-quality exposure and adding some mid-quality credits.
He sold Continental Resources Inc. and Antero Resources Corp., for example, while adding Oasis Petroleum Inc., Whiting Petroleum Corp. and MEG Energy Corp.
The manager: Bryan Pilsworth, president and portfolio manager, Foyston, Gordon & Payne
The fund: FGP Canadian Equity Fund
Going into the year, Mr. Pilsworth established overweight positions in energy and financial stocks dragged down by the crash in oil prices. "We're believers in a gradual global recovery in energy markets. We're looking for where the value is, and right now, that's energy. I'd still argue that's also very much the case for financials," he said.
While the market for crude oil has recovered considerably from the ongoing supply glut, and energy stock valuations as a result have spiked, there is still considerable potential upside in Canadian oil and gas stocks, particularly large-capitalization names, Mr. Pilsworth said.
His largest energy positions are in Suncor Energy Inc. and Canadian Natural Resources Ltd. He added to a position in Husky Energy Inc., which actually declined by 2.5 per cent in the second quarter, and is still nearly 60 per cent below its 2014 high.
"They're improving their balance sheet pretty dramatically," Mr. Pilsworth said.
The big Canadian bank stocks, meanwhile, were having a decent quarter until the Brexit vote. But the sell-off in Canada was much less severe than in other developed markets. "The Canadian banks post-Brexit were some of the best-performing bank stocks globally. I think that says a lot."
The fund was up by 3.2 per cent on the quarter, without accounting for investment management fees, as this is not a public mutual fund.