flexible fixed income fund lp - ewing morris...flexible fixed income fund lp an investment...

Flexible Fixed Income Fund LPAn investment partnership managed by Ewing Morris & Co. Investment Partners Ltd.

Investor Presentation

August 2017

Ewing Morris & Co. Investment Partners Ltd.

1407 Yonge St., Suite 500 | M4T 1Y7 | Toronto ON

www.ewingmorris.com| 416.640.2791

http://www.ewingmorris.com/

-PRIVATE & CONFIDENTIAL-

Guiding Principle

“Our goal is to build an investment firm of which we would want to be clients.”

- John Ewing & Darcy Morris


Contents

I. Ewing Morris Overview 4

II. Ewing Morris Team 5

III. Canadian Fixed Income Landscape 7

IV. Competitive Advantage 8

V. Market Environment 12

VI. Investment Strategy 17

VII. Appendix 20

VIII. Contact Us 30

IX. Disclaimer 31


Ewing Morris Overview

4

Who We Are

► Value driven Canadian boutique investment firm established in 2011

• $263 million of assets under management

• Equity Fund 11.1% annualized net return to limited partners(1)

• 6 investment professionals

► Flexible Fixed Income Fund (the “Fund”)

• 13.2% annualized net return to limited partners since inception

• Consistent firm-wide investment approach and philosophy

Fund Objectives

► Invest – carefully selected, primarily high yield fixed income securities

► Control Risk – through cross-capital structure hedging

► Target Stable 5-7% Net Returns – in a variety of market conditions

(1) As of July 31, 2017. Equity Fund inception was September 9, 2011. Fund inception was February 1, 2016.

Past returns are not indicative of future results. Please note, all AUM and returns are estimates until NAV is finalized.


Ewing Morris TeamExperienced team with strong Advisory Board and governance structure

5

Darcy Morris

Co-President & Chief

Executive Officer

Jill Hamblin

Office Manager

Martin Connell

Linda Haynes

Rosamond Ivey

John MacIntyre

David Peterson

Harry Rosen

Bill Stedman

David Wilson

Advisory Board

Portfolio Management &

Research Team

Operations &

Compliance

Anthony Hammill, CFA

Co-Portfolio Manager

Client

Service Team

Matt Irwin, MBA

Chief Financial &

Operating Officer

Randy Steuart, CFA

Portfolio Manager

Lee Matheson, CFA

Co-Portfolio Manager

Jenna Gillies, CFA

Investor Relationships

Perry Schultz

Operations

Alex Ryzhikov, CFA

Portfolio Manager

John Ewing, CFA

Co-President & Chief

Investment Officer

Emily McConnell

Investor Relationships


► Flexible Fixed Income Fund Portfolio Manager

► Previously Portfolio Manager at Norrep Capital Management

• Co-managed the firm’s $300 million in fixed income assets

• Focused on the high yield market

► Prior to Norrep spent 7 years at Marret Asset Management

• Partner at 24 years old

► B.Com., Sauder School of Business, UBC

• Leslie Wong Fellow, UBC’s Portfolio Management Foundation

Flexible Fixed Income Fund

6

Randy Steuart, CFA


Unconvincing Canadian

Fixed Income Alternatives

7

Investment

Grade

High interest rate risk

Commoditized product

Ewing Morris

Flexible Fixed

Income Fund

Leveraged

Investment

Grade

High leverage

Medium credit risk

Crowded strategy

Low leverage

Lower interest rate risk

Credit risk hedging

Scarce skill set

Where do we play? How do we win?


How We Are Different

8

The key attributes of the Fund that contribute to its uniqueness are:

► The Fund focuses on the high yield bond market

► The Fund utilizes low levels of leverage

► The Fund manages risk through equity hedging

► Our interests are aligned

► Innovative and compelling fee structure

The Flexible Fixed Income Fund targets stable 5-7% net returns


Structural Advantages

9

Hybrid Team

• Integrated research team leverages business and structural insights

• Identify inefficiencies created by the equity vs. debt market silos

• Complementary equity and debt investment philosophy

Risk

Management

Fund Size

• Ability to quickly establish a desired position size

• Size is a challenge to investment returns in less liquid asset classes

• Larger funds may ignore smaller bond issues entirely

• Uncommon risk management process that is rare in Canada

• Capital structure arbitrage strategy can reduce risk and enhance return

• Equity shorts underpinned by business valuation expertise


-30%-20%-10%

%10%20%30%40%50%60%

1989 1993 1997 2001 2005 2009 2013 2017

10

(1) Bank of America Merrill Lynch US HY Index, Bloomberg, August 2017.

(2) Year-to-date 2017.

Attractive Long Term

Asset Class

High Yield Index 30 Year Return History(1)

CAGR 8.5%

Bank of America Merrill Lynch US HY Index

-4.4% -1.0% -5.1% -1.9%

-26.4%

-4.6%

0

+17.5%

(2)

+6.1%


(1) As of July 31, 2017. Class P Master Series. Fund returns are net of all fees and expenses. Past returns are not indicative of future performance.(2) Fund inception was February 1, 2016.(3) Unencumbered Cash

Note: Exposures are monthly averages.

Track RecordThe Fund has generated strong returns at below average risk exposures

11

16.7

46.465.1

79.7 89.2 96.3 90.5 90.8 92.7102.2 99.0 99.7 96.6 101.8 108.3 94.5 89.2 91.4

-0.9 -3.2 -5.5 -5.3 -4.3 -4 -3.3 -3 -3.2 -2.6 -2.9 -2.7 -2.6 -2.7 -2.2 -1.3 -2.6 -3-20%

0%

20%

40%

60%

80%

100%

Invested Assets Equity Hedges Cash (3)

Cumulative

Feb Mar Apr May June July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June July

Since

Inception(2)

Returns(1) 1.4% 3.0% 1.1% 1.4% 0.9% 2.3% 1.1% 0.6% 1.1% -0.2% 0.9% 1.4% 0.3% 0.7% 1.0% 0.7% 0.5% 0.4% 20.4%


12

Market Environment


What Actually Happens When

Interest Rates Rise?

13

Mean bond performance during 14 periods of rate increases: 1998-2014

-5.53%

-0.48%

4.99%

10 yr Treasury Investment Grade High Yield

Mean

peri

od

ch

an

ge

Sources: TIAA-CREF Asset Management; “The Enduring Case for High Yield Bonds”, May 2015.

(1) BofA Merrill Lynch 10-year US Treasury Index.

(2) BofA Merrill Lynch US Corporate Index.

(3) BofA Merrill Lynch US Cash Pay High Yield Index.

(3)(2)(1)

High yield bonds have lower sensitivity to rising interest rates


Total Return

US 10 Year Treasury -7.3%

BofA Merrill Lynch US Corporate Index -1.1%

Ewing Morris Flexible Fixed Income Fund +7.0%

What Happened Recently

When Interest Rates Rose…

14

Source: Bloomberg, January 2017. Past returns are not indicative of future performance.

…from June 30th to January 31st 2017?


90%

95%

100%

105%

110%

115%

5-May-16 30-May-16 24-Jun-16 19-Jul-16 13-Aug-16 7-Sep-16 2-Oct-16 27-Oct-16 21-Nov-16

S&P/TSX Telecom Services IndexS&P/TSX Utilities Index S&P/TSX Real Estate Index

Rate Risk Now Extends

to Many Equities

15

Source: Bloomberg, November 2016.

Telecom, utilities and real estate stocks faced a pullback when rates rose

0.9

1.4

1.9

28-May-16 28-Jun-16 28-Jul-16 28-Aug-16 28-Sep-16 28-Oct-16 28-Nov-16

Government of Canada 10-Year Note

-6% to -10%

+46% or 46bps


Metric S&P 500 High Yield

Earnings Yield(1)5.7% 6.4%

Volatility(2)11.4% 5.4%

Capitalization/EBITDA(3)10.5x 4.5x

….Attractive Relative to

Other Asset Classes

16

(1) Forward 12M Earnings Yield: S&P 500, Yield To Worst BAML Index, Bloomberg; September 2016.

(2) 100 Day Annualized Volatility: S&P 500, HYGNV Index; September 2016.

(3) Forward 12M EV/EBITDA estimate, Bloomberg, September 2016; D/EBITDA, Morgan Stanley Research, September 2016.

How much more return do you need in equities to justify bearing 2x the

volatility and 2x the valuation?


Investment Strategy

17


Similar to our equity strategy, we like to describe our fixed income investment strategy using the analogy of a

sport’s playbook. A team with only one play can often be stopped but a championship team will have practiced

multiple plays to ensure success regardless of game conditions and the opposition’s tactics.

Our Playbook involves four defensive plays:

Investment “Playbook”

18

Equity Hedge

Durable

Business

Credit

Maker

Structural

Value


Alignment of interests Substantially all of the PM’s liquid investable assets are invested in the Fund

Fees Class P: 0.75% management fee + 20% profit allocation after 5% preferred

return

Class T: 1.50% management fee

Perpetual High Water Mark If an investor suffers a loss, performance fee does not start accruing until after

the previous losses have been recouped

Lockup provision None

Liquidity Monthly; 45 day notice

Within 1 year - 4% early redemption fee payable to LP

Reporting Monthly investment statements and pricing

Quarterly commentary

Annual Limited Partners Meeting

Custodian/Prime Broker TD Securities

Fund Administrator Apex Fund Services

Summary of Key Terms

19


20

Appendix


Early 2016 Faced Short Term

Headline Risk…

21

The safest and most potentially profitable thing is to buy something when

no one likes it.” – Howard Marks

Nov-2015 Jan-2016 Mar-2016 May-2016 Jul-2016

7%

8%

9%

10%

11%

BAML US High Yield Index

“Junk-bond losses pile up as traders flee

any whiff of bad news.”

– Globe and Mail

“Junk-Bond Rout Deepens, Sending

Shockwaves Through Stocks and Other

Markets.”

– Wall Street Journal

“The sell-off will be stopped if yields rise to a

level where long-term investors (pension funds

and insurance companies, for example)

think the bonds are a bargain.”

– The Economist

“We expect to continue to build

our holdings [in high yield] over

the coming months.”

– GMO 4Q 2015 Investor

Letter

Flexible Fixed Income

Fund Launch

“Investors pour $7.4bn YTD

into US high yield bond funds”

– Forbes


The last time the high yield market finished a year with a yield above 8%

was 2011 and the high yield index then saw a 15.6% return in 2012

…Creating an Attractive

Entry Point

22

8.3%

15.6%

9.9%

17.5%

2011 Yield 2012 Total Return 2015 Yield 2016 Total Return

High Yield Index & Historical Return(1)

(1) Bank of America Merrill Lynch US HY Index, Bloomberg. Past returns not indicative of future performance.


Common Misconceptions

of High Yield

23

► High Yield = Bad Company

► Risk from Rising Interest Rates

► Insufficient Compensation for Risk


High Yield = Bad Company

24

5.3 bn

16.0 bn5.6 bn

27.0 bn

Debt Equity

Investment Grade

in 2014

High Yield

in 2003…

Source: Company filings, Bloomberg.

There are many good quality high yield issuers


Did you know….

25

The high yield market is large and broad


High yield bond prices are dominated by company performance

What Drives Fixed

Income Returns?

26

2% 2% 2%

2%

6%

Treasury Investment Grade High Yield

Interest Rate Credit Spread

4%

8%

Driver of Returns:

Interest Rates

Driver of Returns:

Company Performance

50%

75%

Interest rates and credit spreads indicative estimates, for illustrative purposes.

2%

Driver of Returns:

Interest Rates


Equity HedgingHigh yield companies tend to have challenges which cause equity value attrition

27

– Equity hedging enables investors to access high yields without bearing the equivalent credit risk

– The bond position will be hedged against this risk by shorting a lesser amount of equity

– If the stock price increases against the position, it is likely that the bond price will increase as well

Bond Equity Hedge

Bond Return Breakeven EquityReturn (1 yr)

9% bond @ 90

25% hedge

10% cash on

cash yield

40% price

increase

Portfolio OverviewMargin of Safety Against

Stock Price Increases

Positions and returns are indicative estimates, for illustrative purposes.


Examples are not representative of entire portfolio. Past returns are not indicative of future performance.

(1) Returns are as of date that hedge or entire position was exited.

(2) Preferred shares.

Realized Hedged InvestmentsCapital structure arbitrage strategy can reduce risk and enhance return

28

Investment

Example

Bond

Return(1)

Equity

Return(1)

Enhancement

/ Drag From

Equity Hedge

Total

Return

Cenovus Energy 39% 21% -5% 34%

Precision Drilling 32% -4% +1% 33%

Hecla Mining 64% 92% -23% 41%

Seagate

Technology36% -7% +2% 34%

Rona(2) 3% 2% -0.5% 2.5%


29

20%

40%

60%

80%

100%

120%

140%

160%

2-Mar-16 22-Mar-16 11-Apr-16 1-May-16 21-May-16 10-Jun-16 30-Jun-16 20-Jul-16 9-Aug-16

(Return) Equity Bond Hedged Position

Capital Structure HedgingRealized Investment – Seagate

Example is not representative of entire portfolio. Past returns are not indicative of future performance.

Earnings

Warning

Date EventImpact

DurationEquity Bond

Impact @ 30%

Hedge Ratio

4/13/2016 Earnings Warning 2 days -25% -5% +3%

4/28/2016 Earnings Release 3 days -28% -6% +3%

7/11/2016 Earnings Release 1 day 22% 10% +3%

Event Shocks – Debt and Equity

Negative Earnings

Release

Positive Earnings

Release

Event risk is the most important risk to manage in high yield

36% profit

7% profit


Contact Us

Darcy Morris Co-President [email protected]

416.640.2791

Randy Steuart Portfolio Manager [email protected]

416.548.5616

Jenna Gillies Vice President [email protected]

416.548.5615

30

mailto:[email protected]




Disclaimer

This document does not constitute an offer to sell units of the Ewing Morris

Flexible Fixed Income Fund LP. Units of the Ewing Morris Flexible Fixed

Income Fund LP are only available to investors who meet investor suitability

and sophistication requirements. The Fund has a flexible investment mandate.

Therefore the Fund’s composition is materially different than major indices.

We have listed the BAML US High Yield Index because it is representative of

a widely known & followed investment alternative.

31

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