Generating positive returns for this year’s Holland Bloorview Investor Challenge won’t be an easy task.
Now in its eighth year, contest participants are faced with a particularly tough investing environment in which both stocks and bonds have been falling in unison. Other asset classes, too, such as cryptocurrencies, have been suffering double-digit losses as central banks tighten the screws on loose monetary conditions and raise interest rates at a breakneck pace.
This year, there are two fund managers facing off to help raise money for the Holland Bloorview Kids Rehabilitation Hospital in Toronto. Organizers said they wanted to experiment with a slightly different format after having three fund managers competing in previous years.
One competitor this year is Sean McNulty, principal and co-founder of XIB Financial Inc. He’s back after participating in the challenge over the past couple of years. (While the annual contest usually runs for one year, it was extended for a two-year period in 2020 because of the COVID-19 pandemic. The charity raised a total of $114,000 over those two years.)
The other is Mike Quinn, principal and founder of RP Investment Advisors.
Each fund manager invests an initial $25,000 and personally raises additional funds for investing through their own philanthropic networks. At the end of the calendar year, all initial investments, gains and donations will be given to Holland Bloorview to support the hospital’s highest-priority needs.
Here’s how both are hoping to demonstrate their investing prowess while raising funds for a good cause. Those looking to donate to the charity may do so at Holland Bloorview’s Investor Challenge website.
Sean McNulty
Mr. McNulty’s XIB Fund, which is managed by XIB Asset Management, allows for a wide range of investments to capitalize on stock inefficiencies along with event-driven opportunities as they come up.
This may include corporate financings, arbitrage opportunities arising from mergers and acquisitions, and the buying or selling of certain stocks that have become temporarily mispriced when being added or subtracted to major market indexes.
It’s an approach that produced a stellar return of nearly 100 per cent in 2021. But lately it’s been struggling, with the XIB Fund down by about 20 per cent over the first seven months of this year. “We’ve got a few of these events wrong so far in 2022. But we’ve also entered or added to some positions at what we believe are very attractive levels,” Mr. McNulty says.
Fewer corporate financings and the fund’s focus on smaller-cap stocks have been particular challenges. The S&P/TSX Venture Composite Index is down 33 per cent this year, more than triple the losses of the S&P/TSX Composite Index, in an illustration of just how much the smaller-cap and retail-investor dominated segment has been struggling.
“The backdrop of a global pandemic, including China still operating with zero tolerance COVID policy, ongoing war involving a global superpower, product and labour supply chain disruptions, and the fallout of the crypto and other speculative assets has continued to weigh on investor sentiment. Although these conditions in 2022 have been challenging, XIB believes that markets move in cycles and the pendulum often swings too far in each direction,” he said.
When overall market conditions improve, he thinks his fund will be well-positioned, especially given its relatively small size allows it to move in and out of low-liquidity equity positions without distorting market prices.
Mike Quinn
In light of the volatile market environment in 2022, RP Investment Advisors’ Mr. Quinn has invested the money into two of the company’s funds, each representing a different market strategy. Half is in the RP Fixed Income Plus Fund, which is a shorter-duration credit strategy, meaning it aims to have lower interest rate risk. The remaining half is invested in the RP Select Opportunities Fund, which is focused on multistrategy credit and has more flexibility to invest in both investment grade and high-yield bonds.
As of Aug. 5, this combination of strategies has earned a total of 0.80 per cent net of fees year-to-date. Mr. Quinn explained that he’s been taking an active approach to allocating funds into the two strategies, which has provided positive returns at a time most fixed-income portfolios have suffered historic losses.
“We’ve seen how central banks have been resolute in their desire to fight inflation and how raising rates could be negative for fixed income, so we wanted the portfolio positioned as conservatively as possible to protect capital,” he said.
“When we felt rates and credit have moved materially and that we were being adequately compensated for risks, we moved the funds from cash to RP Fixed Income Plus. Then, as the market repriced lower with higher yields and wider spreads, we decided to invest half the funds in RP Select Opportunities, which has more flexibility to hold short positions as well. We believe our focus on managing rate risk and being flexible through active management has enabled us to perform relatively well in this environment and earn a positive return for the challenge year-to-date.”