Corporate credit can be a mysterious part of the investment world. For Fulcra Asset Management, an independent Vancouver-based investment-management firm, it’s a way to generate returns for investors willing to make bets on a lesser-known part of a corporation.
“Corporate credit is an opaque thing for a lot of people. We try to unravel the mystery as best we can,” says Matt Shandro, portfolio manager at Fulcra, who oversees more than $100-million in assets under management. Fulcra’s return over the past year, as of the end of May, was 6.7 per cent, after fees. Its annualized return since the firm was founded in 2009 is 8.3 per cent, after fees. The Globe and Mail recently spoke with Mr. Shandro about Fulcra’s strategy and the opportunities he sees in the corporate credit market.
Describe your strategy.
We do deep-value, fundamental credit investing. We rarely buy new issues. We buy loans, bonds, convertible debentures and sometimes preferred shares of companies. We will buy all parts of the debt within the capital structure of a business. I would describe it as opportunistic corporate-bond investing. We try to eliminate interest-rate risk by buying short-duration securities or securities where a bond will be taken out [i.e., the company will repay its obligation] early, prior to maturity. Our average quarterly duration [a measure of the sensitivity of price to a change in interest rates] since inception is about 2.5 years, which is relatively short. We invest in about two dozen companies at one time. There is no leverage and we hedge our currency exposure. We are trying to eliminate the currency risk and interest-rate risk and focus on the credit risk.
How are you affected by rising interest rates?
Rates going up is generally a good thing because it means the economy is doing well. … But when companies refinance their debt, it will be at a higher level, which could reduce the buffer of cash flow over interest costs. They may need to use cash or have to do an equity raise, which could put pressure on equity valuations. This could create volatility in the pricing of capital structures. It doesn’t mean businesses aren’t doing well, it just means we can potentially buy them at a better price than what’s being offered today, broadly speaking. We are looking for dislocation that can happen when rates go higher.
How do you look for opportunities in the market you’re in?
We aren’t different from a deep-value equity type of investor. The price we pay is the most important thing we are focused on. When I buy a bond, I’m looking at asset coverage, the free-cash-flow yield, the cash flow multiple and things of that nature, as opposed to the relative yield. We are kind of agnostic to rating agencies. We will use them in our due diligence, they are very valuable, but it’s only one part of the equation for us. In many cases, you can arbitrage the rating agencies. There are a lot of investment-grade investors that can’t own non-investment grade. That can be a situation where a company has a couple of quarters of poor earnings that we think is transitory and the rating agency isn’t showing the long-term patience and will downgrade. That can be an opportunity for us. An example is last year with Aimia, [which announced its long-term contract with Air Canada will end in 2020]. That price volatility links into the bonds and created an opportunity.
What have you been buying lately?
A recent purchase was the Element Fleet Management Corp. 2019 convertible bonds – the 5 1/8 bond due June 30, 2019. It has strong asset coverage. The company is still paying a dividend, which means they could cut the dividend in a worst-case scenario to help refinance or take out this convertible bond. They’ve had some corporate events over the past couple of years – a strategic review that didn’t result in a takeout of the company; they bought GE’s fleet business and had difficulty managing that. It showed up in the stock. That’s had some impact on pricing of the convertible that created an opportunity for us to buy it below par at an attractive yield of 6.5-per-cent to 7-per-cent yield for a one-year piece of paper – with no interest-rate risk. It’s a good deal in our opinion.
What have you been selling?
Because our fund duration is short, we generally don’t make selling decisions as our investments naturally mature or get redeemed early. We don’t own them, but I’m bearish on some longer investment-grade BBB-rated bonds.
Your focus is debt, but is there anything on the equity side that you wish you’d bought?
Weight Watchers International. We bought the term loan, and we made money but wished we bought the stock [which has risen by about 250 per cent over the past year]. Sometimes we do buy stocks, but it’s a very small per cent of what we do. We only do it if we own the debt.
This interview has been edited and condensed.