How three fund managers are faring in a philanthropic investment challenge

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So much for sleepy summer trading, as a flare-up in the trade war between the United States and China has rattled global stock markets in recent days.

This latest retreat in equity prices, however, has done little to spoil the gains on the year, with every developed market around the world still in positive territory year to date, and with major indexes in Canada and the U.S. easily up by double digits.

For a trio of portfolio managers navigating an increasingly volatile backdrop in support of a greater cause, the global equity updraft has so far proven favourable.

The three are participating in an investment challenge to raise money for the Holland Bloorview Kids Rehabilitation Hospital, which is a pioneer in treatments, technologies and programs for kids with a wide range of disabilities.

Starting with $25,000 donated by their respective firms, each fund manager is investing that money on behalf of Holland Bloorview over the course of 2019, with all capital, investment gains and additional donations going to the hospital. Donations of cash or securities can be made to each manager’s Investor Challenge fund at hollandbloorview.ca/investorchallenge.

Here is how each of this year’s participants has fared so far.

• Aubrey Hearn, senior portfolio manager at Sentry Investments Inc.
• The fund: Sentry Small/Mid Cap Income Fund
• Returns, net of fees, up to end of June: 10.6 per cent

While not necessarily predicting a recession, Mr. Hearn said he has shifted the fund toward companies that might fare relatively well in an economic downturn.

“We're starting to immunize the portfolio a bit from that perspective,” he said. “Now is not the time to add a lot of risk, or add a bunch of extremely cyclical companies.”

Even in economically sensitive sectors, there are pockets of defensiveness, he said. The fund’s Canadian energy holdings, for example, include shares of Inter Pipeline Ltd., which has assets in Western Canada that would be difficult to duplicate, Mr. Hearn said.

In the cyclical industrials sector, Waste Connections Inc. has a recession-resistant business, he added.

And in consumer discretionary, amusement-park owner and operator Cedar Fair LP (which owns Canada’s Wonderland just north of Toronto), should have some resilience to a downturn, with a decline in tourist visits offset by locals on “staycations,” Mr. Hearn said.

• Sean McNulty, co-founder of XIB Financial Inc.
• The fund: XIB Private Capital LP
• Returns, net of fees, up to end of June: 40.4 per cent

The exuberance of retail investors for cannabis shares, combined with a shortage of institutional investors involved in early listings, was bound to send pot-stock valuations “out of control,” Mr. McNulty said.

Many private companies ended up valued at steep discounts to their publicly traded peers.

This fund tries to exploit that gap by investing in undervalued companies and helping to set them up for an initial public offering or a merger. (XIB does not disclose which companies it invests in.)

“We’ve had an industry come out of the shadows into the spotlight,” Mr. McNulty said. “And the industry is still nascent, so there are going to lots of teething issues over time.”

He said he sees cannabis flower becoming commoditized in relatively short order as the industry matures. The real value is in cannabis derivatives and extracts. “There’s more margin in that, there are more barriers to entry and they’re harder to replicate.”

In December, next-generation cannabis products, such as edibles, concentrates and topicals will be added to the list of legal cannabis products in Canada. “There is a lot more [intellectual property] and value add that goes into those,” Mr. McNulty said.

• Alex Sasso, CEO of NCM Investments
• The fund: NCM Growth and Income Portfolio
• Returns, net of fees, up to end of June: 13.2 per cent

Investors are a loss-averse species, experiencing more pain from losing money than satisfaction from an equivalent gain, Mr. Sasso said.

“People like the smooth 6 per cent versus the lumpy 10 per cent,” he said.

NCM’s “pension portfolios,” including this one, are designed to mimic how the big Canadian pension funds invest, with exposure to real assets through exchange-traded funds, using quantitative asset-allocation tools and techniques designed for wealth preservation.

The funds were launched last October, which proved to be both good and bad timing, Mr. Sasso said.

While global stock markets promptly tipped into a sell-off that gathered speed through the fall, the correction proved an opportunity to battle-test the new funds.

“We engineered them to have lower beta on the downside, but do our best to make sure we keep up on the upside. They were able to do that,” Mr. Sasso said.