Five years after trillions of dollars went up in smoke in the global financial meltdown, money managers are still scratching their heads at the swiftness and extent of the carnage.
Well, some more than others. A few felt it was payback time for a 25-year bull market and braced for the blow. Others emerged from the wreckage to capitalize on a new world of opportunity. Here are three fund managers who survived and thrived with timeless lessons for the next meltdown.
A cushion of cash
"We had a lot of cash back then," says Jason Gibbs, who had been at the helm of the Dynamic Small Business Fund with Oscar Belaiche for just more than a year when things started to unravel in the summer of 2008. At the time 35 per cent of the fund was comprised of cash.
That cushion of cash was further cushioned by a large stake in income-generating securities such as the Canadian Apartment Properties Real Estate Investment Trust, which grew in value by 5 per cent while the broader index lost more than half its value. "We're very defensive. We tend to focus on stable cash-flow producing assets," Mr. Gibbs says.
Another income generator that softened the blow and remains a core holding in the Dynamic Small Business portfolio is Northland Power Inc. The clean power producer increased in value by 4 per cent in 2008, is up more than 80 per cent since, and currently pays an annual dividend yield of 6.3 per cent. "What you're getting is contracted government-backed revenues. They just build power plants and sell the power to government entities," he says.
Steady returns over the past decade have virtually smoothed over the meltdown for the fund, resulting in an average annual return of more than 15 per cent going back to 2003 – nearly double the average Canadian small-cap fund and the benchmark BMO Nesbitt Burns Canadian Small Cap Index.
Mr. Gibbs says the trick is to stay true to a conservative investment philosophy even when bargain-basement valuations seem too tempting. "When you see the knives falling, you step aside and find your opportunities as they come along."
One of those opportunities in the portfolio is Morneau Shepell Inc. The human resources consulting and outsourcing firm has doubled in price since December of 2008 and pays a 5.5-per-cent dividend yield. "Morneau is just a wonderful, dominant Canadian business in the right space – fantastic management. They've been around a long time and demand for their services continues to increase," Mr. Gibbs says.
Big value in small caps
Canadian small caps are normally a volatile asset class but for some small-cap funds the meltdown has been reduced to a pothole on the road to prosperity. Over the past 10 years the Mawer New Canada small-cap fund has managed to pave over the plunge with an annual average return of 14.2 per cent.
Lead manager Martin Ferguson chalks it up to picking good stocks that will eventually do well in any sector or market environment. "We are index agnostic. We don't care if a stock is in a certain universe. We care if it's a good company and we can buy it at the right price," he says.
He admits his faith was a little shaken when the fund lost nearly a third of its value in 2008 but takes solace in knowing the broader index lost nearly half. "If you were a fund manager and you're getting massive redemptions you had to sell. No one was buying the crappier companies so you had to sell the good companies," he says.
Roughly one-third of the portfolio was cushioned by income trusts and other cash-generating securities but Mawer's bottom-up value model meant having to be patient while the market found a bottom. "We established positions in really high-quality but fairly illiquid companies, so we positioned ourselves for a rebound that was to come starting in 2009," Mr. Ferguson says.
One of those rebound positions has been Paladin Labs Inc. Shares in the drug company have climbed 283 per cent since they were first added to the fund in April of 2009. "They are diversified across a number of different products and diversified outside of Canada," he says.
Home Capital Group Inc. is another meltdown survivor that was first included in the Mawer New Canada portfolio in late 2001. Shares in the alternative mortgage lender have risen 288 per cent from their meltdown low in November of 2008. They are up 1,370 per cent since late 2001. "The home market is a lot more stable than people realize," Mr. Ferguson says.
Picking up the pieces
One pure-play Canadian equity fund that rebounded after feeling nearly the full wrath of the meltdown is the Bissett Canadian Equity-F fund. Going back to June of 2008 – the eve of the meltdown – the fund has managed to bring its five-year average annual return up to 5.6 per cent while the average Canadian equity fund and the TSX Total Return Index remain slightly below premeltdown levels.
"It clearly has been a good run," says lead manager Garey Aitken, who is also a bottom-up value investor. "For us it's been for a really fertile environment for stock picking and security selection."
He says the biggest postmeltdown opportunities have been in energy and materials as shell-shocked investors flocked to the safety and relative certainty of commodities.
However, as commodity prices slump this year he's moving his profits to fertilizer producers such as Potash Corp. of Saskatchewan Inc. and Agrium Inc., which continue to increase their dividends. "They haven't been nearly as weak as the gold and base metals have, although they too have seen weakness," he says.
While the fund holds large positions in the big five Canadian banks, he says it's life insurance companies such as Manulife Financial Corp. and Sun Life Financial Inc. that are providing the best value. "Clearly the lifecos benefit from higher interest rates and higher equity markets," he says.