Presentation on theme: "Managing Returns and Risk Using Alternative Strategies"— Presentation transcript:
1 Managing Returns and Risk Using Alternative Strategies Tim Lazaris and Brian HuenRed Sky Capital Management
2 Red Sky Capital Management Founded in March 2010 by Timothy LazarisEmployee-owned with CI FinancialApproximately $250 million in AUM in four fundsSophisticated high net worth advisors and investors located mostly in CanadaAlternative manager with a deep, unique connection to a large public asset management company (Stephen MacPhail is senior member on Board of Directors)Partners Fund launched September 2010, closed in 2013 – today, founders and shareholders represent 45% of the fund assetsPartners Fund II launched in 2014 seeded by founders and shareholdersRed Sky Canadian Equity Corporate Class – top quartile 2013Three full-time portfolio managers – worked as a team for six years and 55 years of combined capital markets experience
3 Our teamTeamBackgroundResponsibilities & CoverageTimothy Lazaris, CPA, CA, CFA President ,CEO and CIO4.0 yrs PM at RSCM2.5 yrs Portfolio Manager at GMP Investment Management10 yrs Research Analyst at GMP Securities5 yrs Research Analyst at RBC Capital Markets (Ranked #1 in Canada by Brendan Woods)Portfolio ConstructionCapital AllocationRisk ManagementComplianceFinancial ServicesTechnologyTelecom , Cable and MediaReal EstateDariusz Nieciecki, CFA Managing Partner2.5 yrs Associate Portfolio Manager at GMP Investment Management3 yrs Global M&A at Lehman Brothers/Scotia Capital2 yrs Equity Research at CIBC World Markets and TD SecuritiesEnergyIndustrialsHealthcareTransportationBrian Huen, CFA Managing Partner3.5 yrs PM at RSCM6 yrs on the Institutional Equity Sales desks of CIBC and UBS2 yrs Private Equity at TD Capital3 yrs Invest. Banking / M&A at Credit SuisseTradingConsumersMaterialsEvent DrivenMerger ArbitragePeter Cranston - AssociateFormerly with CI InvestmentsAll Sectors
4 Partners FundsOur firm specializes in North American equities and our disciplined investment process is deeply rooted and focused on risk management.The Partners Fund and Fund II are multi-strategy equity fundsCore investments (long bias)Trading strategy (long & short)Market neutral / mergers and arbitrage
5 Partners Fund II – launched January 2014 ObjectivesClosely trace the performance of Red Sky Partners Fund – an absolute return fund, currently closed to new investorsAbsolute returns in all market conditionsCapital preservationRisk managementDiversificationSuperior risk-adjusted returnsRisk at/or below the TSXReturns at/or higher than TSX
6 Red Sky Partners Fund – variance Annualized Standard Deviation Since InceptionRSPMF9.5%TSX TR12.6%Source: Bloomberg, Red Sky Capital Management6
7 Red Sky Partners Fund – performance Growth of $100,000Return Sept 1, 2010RSPF Series S$135,37735.38%TSX Price Return Index$131,20431.20%TSX Total Return Index$147,15947.16%Source: Bloomberg, Red Sky Capital Management7
8 Core portfolio investment process summary Clarity of tangible objectives – identify a select number of high-conviction, company-specific opportunities that will deliver outsized returns over the next 1-3 years.____________________________________________________________________________________________ Understand the landscape – years of on-site company visits, ongoing engagement with industry contacts, analysis and industry screens.____________________________________________________________________________________________Identify the opportunity: Source ideas in the process of ongoing industry due diligence and via industry researchFundamental analysis – three primary stagesConduct long-term (5+ years) historical analysis of the company’s fundamental drivers and valuationCreating a mosaic to thoroughly understand, evaluate and compare the company to its industryEvaluate management, strategy and executionDo they do what they say they do? Was their success or failure because of or in spite of themselves? What is their view of their industry and strategy going forward in light of our view of their industry and strategy going forward?Determine intrinsic value by applying some primary valuation measuresDiscounted cash flow, price relative to normalized earnings power, and private market valuePresent analysis to the entire investment team for reviewApproved ideas considered for inclusion in portfolioPortfolio constructed at stock-specific level with best risk-adjusted ideas that are consistent with our macro callRisk controls embedded at stock level and portfolio levelChief Investment Officer works with portfolio manager to identify the hedges we can utilize to remove market risk.
9 Multi-strategy portfolio approach CapitalCoreTradingMarket NeutralFundamental Stock SelectionDetailed Due DiligenceContinuous ReviewSentiment or Momentum DrivenTechnical AnalysisSystematic Stop LossesEvent-Driven/ M&ACapturing a Defined ReturnComplex Review ProcessLong BiasLong or ShortUncorrelatedCapital AllocationMacroeconomic FactorsMarket SentimentFundamental Valuation
10 Portfolio construction Core PortfolioTrading PortfolioMarket NeutralInvestment StyleFundamental bottom-upSentiment, technical factorsEvent-driven, merger arbitrageTrade DurationMid and long-termShort-termShort and mid-termTrade SizeLarger (max 5% of fund)Smaller (max 3% of fund)Trade dependent – may deploy leverageProfit & Loss RealizationTarget driven (or change in fundamental thesis)SystematicCompletion of transactionRisk Management ReviewPosition size, liquidity, industry concentrationLiquidity and adherence to established stop lossesDetailed due diligenceOverall, portfolios have had a long bias since inception. When combined with extreme liquidity and short trading, volatility is reduced while allowing markets to stabilize.
11 How do we hedge/manage risk? Liquidity – 90% of portfolio can be converted to cash in three days– very few private investments and rarely brokered dealsListed options – puts, put spreadsShort selling – at all times and in all market conditionsMacro hedges – index futures both in Canada and the U.S.Commodity hedges – short underlying commodityETFs and structured productsSell discipline – intrinsic value, thesis changed, make room for new/better idea, price drops create review or stop loss
12 Our mutual funds available on CI’s platform Red Sky Canadian Equity Corporate ClassLaunched January 1, 2013AUM approximately $10 millionIn 2013, return was 27.20% compared to 12.99% for TSX TR – top-quartile fundBest long ideas from Partners FundNo hedging other than liquidity and possible elevated levels of cash (up to 40%)Can short and use options when necessaryCI Canadian Small/Mid Cap FundBecame sub-advisor (with Picton Mahoney) January 1, 2013AUM approximately $450 millionIn 2013, return was 21.99% compared to S&P/TSX Total Return of 12.22%Small and mid-cap mandateInvests in companies with a market capitalization of less than $5 billionBest long ideas from Partners Fund that fits the mandateDoes not look like the index or the benchmarkAble to be materially overweight sectorsAble to be completely zero weighting in sectorsAble to include some U.S. equitiesBoth of these funds are managed like a hedge fund andwill look to generate absolute returns in all markets. Due to a limitation on shorting, it will not have the same volatility as the Partners funds.Annualized returns located in appendix.
13 Performance metrics Series S (2011–2013) Partners Fund Return was (1.68%) compared to (8.73%) TSXTR2012Returned 4.07% compared to 7.18% TSXTR2013Returned 16.57% compared to 12.99% TSXTRThree Year (2011 – 2013)Returned 19.27% compared to 10.54% TSXTRVolatility 7.20% compared to 10.24%**Using monthly return dataAlpha Generation7.05%(3.11%)3.58%8.73% better with approximately 70% of the volatility.Source: Bloomberg, Red Sky Capital Management
14 Red Sky Partners Fund – performance 2013JanFebMarAprMayJuneJulyAugustSeptOctNovDecYearRSPF Series S1.26%(1.29%)0.59%(0.41%)2.84%(0.98%)3.26%(0.95%)2.38%3.56%3.14%2.23%16.58%TSX Price Return2.02%1.08%(0.56%)(2.30%)1.56%(4.12%)2.95%1.34%1.05%4.49%0.29%1.69%9.60%TSX Total Return2.25%(0.19%)(2.07%)1.77%(3.76%)3.19%1.55%1.40%4.72%0.45%1.99%12.99%2012JanFebMarAprMayJuneJulyAugustSeptOctNovDecYearRSPF Series S2.72%1.83%(0.33%)(1.15%)(3.42%)(0.11%)0.61%2.00% 2.47%(0.31%)(0.53%) 0.37%4.07%TSX Price Return4.16%1.54%(1.99%)(0.80%)(6.34%)0.72%0.59%2.44%3.08%0.86%(1.48%)1.59%4.00%TSX Total Return4.37%1.67%(1.63%)(0.60%)(6.14%)1.10%0.80%2.65%3.43%1.07%(1.28%)1.95%7.18%2011JanFebMarAprMayJuneJulyAugustSeptOctNovDecYearRSPF Series S1.93%2.05%2.04%2.19%(1.91%)(1.75%)0.40%(3.99%)(3.90%)3.42%(1.05%)(0.77%)(1.68%)TSX Price Return0.81%4.31%(0.14%)(1.21%)(1.02%)(3.64%)(2.67%)(1.37%)(8.97%)5.40%(0.39%)(2.04%)(11.08%)TSX Total Return0.98%4.44%0.12%(0.87%)(3.33%)(2.49%)(8.65%)5.60%(0.22%)(1.70%)(8.73%)2010JanFebMarAprMayJuneJulyAugustSeptOctNovDecYearRSPF Series S1.04%0.91%1.77%3.70%7.60%TSX Price Return3.82%2.49%2.18%3.79%12.85%TSX Total Return4.09%2.71%2.37%13.92%Source: Bloomberg LP, Red Sky Capital ManagementAll returns in Canadian Dollars.14
15 Red Sky Partners Funds Series S – performance year to date Red Sky Partners Fund IRed Sky Partners Fund IISource: Bloomberg, Red Sky Capital Management15
16 Partners Fund statistics Since InceptionRSPF Series STSX Total ReturnAverage Month0.65%0.85%Best Month3.88%5.60%Worst Month(3.99%)(8.65%)Win/Loss %58%67%Sharpe Ratio11.191.10Current Month (August 2014)Correlation210.53Standard Deviation26.49%6.16%Days to liquidate33N/ALeverage ratio0.98:1Sharpe ratio calculated using monthly figuresCalculations based on returns in local currency.(3) 90% of portfolio can be liquidated using 25% of the 20 day moving average of trading volumeSource: Bloomberg, Red Sky Capital Management16
17 Red Sky Capital Management Top 5 long investment ideas – next monthsNameSectorThesisCurrent Price *Target PriceExpected ReturnElement Financial (EFN-TSX)FinancialsGrowth Co. with superior management. Partnered with Life Insurance Industry. Filling a large gap in asset based finance after financial crisis. Growth is organic and acquisitive. Rising ROE and exit strategy to sell to large financial institutions.$14.00$19.5039%IGM Financial(IGM-TSX)One of Canada’s largest asset manager and the only one with a large captive sales force. With S&PTSX up 14% IGM’s AUM has grown in market performance and net sales yet shares have underperformed its peers. Dividend yield of 4%+ valuation below peers. If/when Mackenzie Financial goes positive in net sales, multiple expansion is expected.$52.75$65.0028%Apple Corporation(AAPL-NASQ)TechnologyProducer of the most successful handheld wireless devices including iPhone and iPad. Now entering a totally new segment with iWatch. During innovative periods, Apple performs very well and the iPhone6 refresh cycle is expected to be a great success. Great balance sheet, valuation very defensible and transaction revenue model with Apple Pay could result in multiple expansion.$100.00$120.0020%Michael Kors(KORS-NASQ)ConsumerMichael Kors is a retailer of “affordable luxury” fashion for women and men. The company has been growing dramatically in both new and same store’s sales . Includes North America , Asia and Europe. At the current P/E KORS trades at a valuation that does not reflect the growth and profitability potential of the company.$76.5031%Elkwater Resources(ELK-TSXV)EnergyElkwater Resources (soon to be Striker Exploration) lead by Doug Bailey is being backed by Neil Roszell (Raging River). We see this as a very early stage with Raging River and with huge return prospect. It was just announced last month, the management team and all-star board of directors are looking for a transformational acquisition of Alberta Viking properties. The team has a multiple disciplinary skill set in exploration, production, finance and capital markets. Above average risk with high return prospect.$0.75$1.75233%
18 Red Sky Capital Management Continuous experienced portfolio management teamPartnership with CI FinancialProcess-driven investmentsSignificant committed capitalActiveFlexibility
19 Red Sky Partners Fund Multi-strategy portfolio approach Absolute returnsSuperior risk-adjusted returnsAlternative to primarily Canadian equities
20 Red Sky Capital Management 15 York St, 2nd FloorToronto, Ontario, M5J 0A3Tel:Fax:Timothy LazarisChief Executive Officer/Chief Investment OfficerBrian HuenManaging Partner20
21 FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO CLIENTS Thank youFOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO CLIENTSCommissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise indicated and except for returns for periods less than one year, the indicated rates of return are the historical annual compounded total returns including changes in security value. All performance data assume reinvestment of all distributions or dividends and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. ®CI Investments, the CI Investments design, are registered trademarks of CI Investments Inc. This communication is published by CI as a general source of information and is not intended to provide personal legal, accounting, investment or tax advice. Facts and data provided by CI and other sources are believed to be reliable when posted; however, CI cannot guarantee that they are accurate or complete or that they will be current at all times. CI and its affiliates will not be responsible in any manner for direct, indirect, special or consequential damages howsoever caused, arising out of the use of this presentation.
22 Appendix – annualized returns Performance as at August 31, 20141 year3 year5 year10 yearSince inceptionRed Sky Canadian Equity Corporate Class25.3%n/a22.7%*S&P/TSX Composite Index27.1%-18.1%CI Canadian Small/Mid Cap Fund25.2%11.9%14.9%7.7%7.8%**S&P/TSX Completion Index27.0%9.3%14.1%9.4%n/a****December 2012** November 1992***S&P/TSX Completion Index was created in January 2000 after the launch of CI Canadian Small/Mid Cap Fund in 1992Source: Paltrak
23 Appendix – risk focusGenerate consistent annual investment returns and long-term capital appreciation of the units.Employ active hedging strategies and short positions to maintain a balanced portfolio.Interests of portfolio management team strongly aligned with unitholders.Capital PreservationIndustry , position, and strategy limits ensure a well diversified portfolio at all times.Core and trading positions limited to a maximum 5% and 3% of AUM respectively.Ability to invest in multiple markets and asset classes provides a unique opportunity.DiversificationUtilize technology and a rigorous risk management process to minimize portfolio volatility.Strict liquidity metrics are continuously monitored by the portfolio management team.Strict limits on investments in small-caps and private placements.Risk Management23
24 Appendix - investment process Macroeconomic AnalysisSector / IndustryCompany Selection / Fundamental AnalysisTechnical / Market IntelligencePortfolio ConstructionIdentify emerging macroeconomic themes.Identify where we are in the market cycle.Consider social/political landscape and the potential impact on overall investment thesis.Anticipate any changes in key macroeconomic factors that may impact the funds overall investment thesis.Identify those sectors which we believe provide investment opportunities based on our macro analysis.Rigorous fundamental analysis to identify companies well positioned in the context of the macro environment.Bifurcate between short-term trading opportunities and long-term investments.Seek out companies with near-term catalysts that may create significant volatility in the price of the firms’ securities.We respect technicals and triangulate fundamentals, technicals, and market intelligence before establishing a position.Leverage our strong relationships with key market participants to identify best investment opportunities.Sentiment towards an asset, sector or theme is a critical consideration.Identify exit/entry points based on technical factors.Select optimal investment mix of companies, industries and cash.Adhere to strict risk management process.Limit concentration in any one industry and company.Portfolio management system used to continuously monitor overall exposure.24
25 Appendix - biographies Timothy Lazaris CA, CFA - President & CEOPrior to founding Red Sky Capital Management Inc. (RSCM), Timothy was one of the founders and a managing partner of GMP Investment Management L.P.Before that, he was a Director and one of the early partners of GMP Securities L.P. having joined in March 1998 to establish the Financial Services practice.Prior to GMP, he was a Vice-President at RBC Capital Markets and a Research Analyst.Over his 14 year career as a research analyst, specializing in Financial Services, he achieved high rankings in independent surveys including a number one ranking in Canada as determined by Brendan Woods.Mr. Lazaris is a graduate of the University of Toronto (St. Michaels College) where he earned his Bachelor of Commerce degree and continued his professional education by obtaining his Chartered Accountants (CA) designation while working at Deloitte and his Chartered Financial Analyst (CFA) designation.Mr. Lazaris was a member of the Bishop Strachan School Board of Trustees where he is the head of the Audit Committee and a member of the Investment Committee and is currently a member of the Bishop Strachan School Board of Governors and a member of the Finance Committee.25
26 Appendix - biographies Dariusz Nieciecki, CFA – Managing PartnerPrior to joining Red Sky Capital Management Inc. (RSCM), Dariusz Nieciecki was a Vice-President and Associate Portfolio Manager of GMP Investment Management L.P. (GMPIM)Dariusz was responsible for the development and execution of investment strategies across a wide range of industry sectors utilizing equity, credit and derivative securities.Prior to joining GMPIM, Mr. Nieciecki, was an Associate in the Global Mergers & Acquisitions group at Lehman Brothers and Scotia Capital for approximately 3 years.Mr. Nieciecki advised corporate clients and financial sponsors on various financial advisory mandates including mergers, acquisitions, divestitures, leveraged buyouts and recapitalizations.Prior to that, Mr. Nieciecki worked in the Equity Research Department at TD Securities and CIBC World Markets with a top-ranked analyst.Mr. Nieciecki received his Bachelor of Commerce from Queen's University in 2000 and his MBA from the Schulich School of Business at York University in Mr. Nieciecki also obtained his Chartered Financial Analyst (CFA) designation in 2005.26
27 Appendix - biographies Brian Huen, CFA – Managing PartnerPrior to joining Red Sky Capital Management Inc. (RSCM), Brian Huen was a Executive Director at CIBC Wholesale Bank in its Institutional Equity Division and spearheaded the Bank's hedge fund efforts.Prior to CIBC, Brian was a Director at UBS Canada in its Institutional Equities Sales Division advising global hedge fund clients on event-driven, risk arbitrage and equity long / short trading strategies.Brian has also held various positions at TD Capital, Credit Suisse and Scotia Capital. Brian holds both a Masters Degree in Business (MBA) and an Honours Business Administration (HBA) degree from the Ivey Business School at the University of Western Ontario.He is also a Certified Management Accountant (CMA) and a Chartered Financial Analyst (CFA) charterholder.27