MARCH 2017

CAPITAL INVESTMENT FUND

  • +0.39% (Class A)
  • +0.46% (Class F)

OPPORTUNITIES FUND

  • -1.59% (Class A)
  • -1.47% (Class F)




The end of March signals many things; hopefully the end of winter, the Masters Golf Tournament, street cleaning, wind, the end of Q1 business, and Julian's first Investor Letter of the year.  Over to Julian as he summarizes performance for both of our funds and shares his outlook going forward.

Sincerely,

Jai Hawker


Capital Investment Fund

RSCIF units gained 0.7% in Q1 of 2017.  Trailing annual volatility for the Investment Fund was 3.0% and its correlation to the S&P/TSX Composite Index remains near zero over the past 5 years. 

The Investment Fund made 24 structured product arbitrage and 3 merger arbitrage investments in the quarter.  The Fund also had a positive signal on its volatility strategy throughout most of the quarter and exited the position profitably by the end of March.  At the end of the quarter, we were monitoring 123 redeemable structured products with total market value of $9bn ($74mm average size).  The Investment Fund ended the quarter with 29 structured product investments.

All strategies within RSCIF were positive for the quarter, with performance led by the volatility and multi-factor strategies.  The volatility and multi-factor strategies have returned 3.9% and 3.1% year-to-date, respectively.

Opportunities Fund

RSOF units declined 1.1% in Q1 of 2017.  Trailing annual volatility for the Opportunities Fund was 7.0% and its correlation to the S&P/TSX Composite Index was 0.13.

The Opportunities Fund made 16 new investments during the quarter, including 8 merger arbitrage, 4 relative value arbitrage, 2 high yield and 2 special situations investments, while exiting 16 investments.  At the end of the quarter, we were monitoring 114 risk arbitrage situations globally with total market value of over C$1.1 trillion.

Gross exposure (long + shorts) of RSOF was 177% as at quarter end with 56% of the portfolio invested in Canada.

The YTD decline in RSOF was driven by the special situations portfolio, with noted weakness in the performance of spin-offs.  Empirical evidence shows that spin-offs have outperformed in the past, however, this strategy has disappointed as of late.  The merger and liquidation portfolios notched strong gains in the quarter to partially offset this.  In our relative value strategy, tracking stock discounts came in slightly, however many tracking stock discounts remain at exceptionally wide levels. 

Outlook

We are seeing the best opportunities in small cap merger arbitrage, with some merger spreads showing IRRs greater than 20%.  However, allocations to these investments are limited due to liquidity and self-imposed risk management constraints.

We are seeing an interesting divergence in the North American merger space.  In the US, year-to-date deal count is the lowest in four years while $ volume is the lowest in three years, according to S&P Global Market Intelligence.  In contrast, year-to-date deals in Canada are the highest since 2012.  March marked the first month in recent memory in which Canada matched the US for announced deals at 12.  As for our merger strategy, we prefer to invest in Canadian deals as historically these are less analyzed and typically provide more attractive spreads.

In the structured product universe, spreads remain stubbornly tight.  Because of this, our allocation to this strategy has been relatively low given our required hurdle rate.  In addition, over one fifth of the structured products we monitor are currently trading at a premium to NAV, which is an odd phenomenon.  Typically, an increase in volatility leads to more structured product discounts and a higher capital allocation from RSCIF.

With solid performance YTD in our volatility and multi-factor strategies brings increased confidence in these strategies.  We plan on further increasing the Investment Fund’s allocations to these investments.

Julian Klymochko, CFA 

Trout Taylor