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MONTHLY NEWSLETTER
Fund Overview
Credit Strategies Fund Metrics Fund Performance (net of all fees and expenses)1
Year Jan Feb Mar Apr May Jun July Aug Sept Oct Nov Dec YTD
2015 0.52% 1.54% 0.15% 0.55% 0.52% -0.11% 0.06% -0.95% 2.29%
2014 0.44% 1.32% 0.87% 0.85% 0.48% 0.41% 0.01% 0.09% -0.28% 0.33% 0.10% -0.27% 4.44%
2013 1.12% 0.42% 0.43% 0.52% 0.54% -2.52% 0.53% 0.21% 0.00% 1.18% 0.92% 0.94% 4.33%
2012 0.53% 0.36% -0.43% 1.33% 1.61% 0.89% 1.59% 1.06% 0.54% 1.03%
10.69%*
8.83%
Growth of $1000 Since Inception - (Mar 1, 2012 - Aug 31,2015)
Ratings reflect portfolio holdings as of Aug 31, 2015⁵
21.29% 13.72% 6.93%
Lawrence Park Asset Management Ltd. 15 York Street, 4th Floor, Toronto, Ontario, Canada M5J 0A3 www.lawrenceparkam.com
XCB:XCB CN EQUITY │BGCI: Barclays Global Corporate Index
Annualized Return
Volatility4
Sharpe Ratio4
2.29% 1.30%
2.54%
5.67% 3.74% 1.93%
0.45
Metric LPCSF XCB 2 BGCI 3
YTD Return
Total Return since
Inception1
Risk and Return Metrics
August, 2015
The Lawrence Park Credit Strategies Fund is a global credit strategy. Utilizing our extensive global experience, the managers invest primarily in domestic
and global investment grade corporate bonds with currency and rate hedges in place to protect against interest rate volatility. The Fund is actively managed
across a number of relative value and trading strategies, and is based on the founding principles of delivering capital preservation, low volatility and
consistent returns.
-1.19%
3.27% 2.06%
1.80 0.83
Canada 51%
Europe 16%
United States 31%
Asset Holdings by Region 3
0% 10% 20% 30% 40% 50%
AA
AA
AA
BB
BB
BB
1,000
1,020
1,040
1,060
1,080
1,100
1,120
1,140
1,160
1,180
1,200
1,220
1,240LPCSF XCB BGCI
Corporate Bond Index Corporate Spread Index
$1,213
$
$1,069
$1,137
2 3
1
July/August Newsletter
It’s been a challenging year for investing in global markets. Volatility is on the rise, commodity prices
have crashed, and emerging markets have been fragile. Global stock markets began the year strongly
but have since fallen back. Against this backdrop, interest rates have remained persistently low, aided
by Central Bank easing in Canada, Europe and Asia even as the US Federal Reserve has moved to a
tightening bias and sits at the precipice of hiking rates. But low rates have not been enough to make
bond or equity investors happy. Since a sharp January rally to start the year, the Canadian Bond Index
has lost 2% while the TSX has lost roughly 5%.
Fixed income is not the diversifier it used to be. Yields are eye-wateringly low, particularly after
allowing for management fees, and while rates have not trended higher there has been sufficient
volatility to make bond fund returns disappointing. And the recent poor performance of bonds during
down months in stocks has left investors scratching their heads.
First Principles: The case for Investment Grade Credit
Investors we speak to are dealing with a conundrum. They either cannot eliminate fixed income from
their portfolios (due to investment guidelines) or are unwilling to (due to concerns over equity
volatility). Most are looking to diversify their fixed income. Traditional fixed income strategies
generally fall in two camps: long-duration government-heavy bond funds which offer little yield but have
performed well in recent years due to falling rates, and High Yield strategies which rely on careful name
selection and timing to avoid default losses.
Investment Grade Credit strategies can bridge the gap between long duration and high yield. The
Investment Grade funds offered by Lawrence Park utilize low duration which minimizes their exposure
to interest rates. Our funds involve little of the default risk
associated with High Yield. Standard and Poor’s publishes a
multi-year history of default rates among bonds rated both
Investment Grade and High Yield. The difference during
distressed periods can be dramatic. Default rates among High
Yield bonds have been known to rise as high as 10%, while
Investment Grade bond defaults have never risen above 0.5%
(see graph).
Low default rates don’t mean you completely avoid price fluctuations on your portfolio. Bonds can
trade down prior to maturity for any number of reasons; perceived impairment of the company,
deteriorating sentiment in a particular sector, or a higher prevailing cost of capital in the market.
However the expectation of realized losses is far lower with an investment grade bond, as it is highly
expected to eventually mature at par.
Our strategies remove a large source of the month-to-month volatility in a generic fixed income fund
(interest rates), while maintaining a credit risk profile which remains very strong throughout the
economic cycle. Add to that an active management strategy that takes advantage of market
0
2
4
6
8
10
12
% D
efa
ult
Rat
e
Year
Investment Grade
High Yield
Source: S&P Ratings Direct
Default Rates in High Yield tend to spike during recessions
inefficiencies to generate additional gains, best-ideas selection from global markets by our team of
experienced portfolio managers, and the opportunity for upside through participation in cyclical credit
rallies, and you have a product which offers a superior risk-reward profile to many cash and bond
alternatives.
The Credit Cycle
Prior to August most market participants, if polled, would suggest the market had been ticking along in
2015; no spectacular gains but no material losses either. August was a wakeup call; with the MSCI
World Equity index trading down over 6.5% in US dollar terms, reducing the YTD gain of 4% to a YTD loss
of 2.5%.
In fact, credit markets have been in a secular decline since mid-2014, roughly in line with the end of the
Fed’s QE program. The JP Morgan US Liquid credit spread Index (JULI) widened from a low of 121bp in
June 2014 to a high of 202bp in August 2015 which translates to approximately a 6.5% drop in the
implied price of a generic 10 year corporate bond. That’s almost a 70% widening of credit spreads in 14
months.
It’s not unusual for credit spreads to widen ahead of an interest rate tightening cycle, or to commence
widening well ahead of a stock market selloff. The widening is primarily technical: investment grade
fundamentals remain sound and default rates remain near historic lows. In a recent research piece,
Wells Fargo wrote “history shows that corporate
credit spreads tend to struggle in the 3-6 months
prior to the first rate hike as investors anticipate
tighter monetary policy. Typically, credit spreads
tend to stabilize once the rate hiking cycle begins
and remain steady until tighter monetary policy
starts to slow the economy.1” While the recent
selloff in in credit has made creating outsized
returns more challenging, our active management
approach allowed us to protect capital and accumulate risk at more attractive levels. At current market
prices we prefer a credit strategy to a traditional bond strategy, which effectively owns risk near the
lows in global interest rates.
August Volatility
For the most part, the performance of our fund in August was within reason given the heavy losses
incurred in many asset classes. We did sustain some losses in the energy and pipelines sector, despite
our efforts to neutralize our exposure by shorting expensive Canadian dollar bonds against cheaper US
dollar long bonds. Illiquid markets drove the pricing relationship to extreme levels during August, and
our energy sector positions account for roughly half the losses in the portfolio for the month. We
remain bullish that these inconsistencies will correct themselves over time.
1 Wells Fargo Credit Connections, 17 July 2015.
120
130
140
150
160
170
180
190
200
210
Credit spread widening since June 2014
Source: JP Morgan
2013 Taper Tantrum
FED Removal of QE
(Dec ’13 – Oct’14)
Credit Spreads at a 3 year wide
Trading Themes
The summer months are always challenging given the lack of trading opportunities. New issue markets
were largely closed during August, and secondary trade volumes were down substantially. In calm
markets you would wait it out and generate positive accruals; while in disrupted markets you would
normally look for opportunities to generate trading gains due to dislocated bond prices. However, the
lack of liquidity in July and August made it difficult to generate trading gains. We have seen a pickup in
market liquidity since Labour Day and anticipate active markets now through to mid-December.
One notable trade was a new Capital note issued by Royal Bank of Scotland in US dollars. The bonds
pay an 8% coupon for 10 years and were trading up as much as 3% from par in secondary trading. In
tandem with the new issue RBS called a number of legacy preferred shares at par allowing us to realize
gains on some of these securities that we purchased below par. Followers of Lawrence Park will know
that Royal Bank of Scotland has long been a favourite credit of ours, and we continue to see profitable
opportunities in the name.
Conclusion
As we write this newsletter, the US Federal Reserve is pondering whether to raise rates for the first time
in almost a decade. Regardless of whether the rate hike comes in September or later, it is clear we are
moving into a new phase of the recovery cycle. We anticipate the next few years will be a period of
higher volatility and fewer discernable trends. Many assets classes will be subject to price volatility, and
explorers, producers, manufacturers, sellers, hedgers and investors alike will need to adapt and re-price
their activities. Credit spreads (with interest rate exposures hedged) are near their recent wides and
should provide an attractive investing point. Investors would do well to consider now if their portfolios
are as robust as they could be.
As always, we welcome your questions and comments.
The Lawrence Park Team
Please Read The Following:
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Auditor KPMG
Administrator CI Investments Inc, RBC Investor Services
Legal BLG
High Water Mark Permanent
FundServ CIG6451 (B),CIG6453 (G);CIG6455(H);CIG6456 (I)
Prime Brokers Deutsche Bank, Scotia Capital,TD Securities
Minimums $25,000 (B,H);$150,000 (G); $500,000 (I)
Management Fee 1.25% (H,I); 1.50% (G); 2.00% (B)
Performance Fee 10% (I); 15% (G), 20% (B,H)
Launch Date March 1, 2012
Subscription Monthly
Redemption Monthly, 45 days notice
Fund Lawrence Park Credit Strategies Fund
Structure Canadian Mutual Fund Trust
Portfolio Managers Andrew Torres, Jason Crowley
Current and prospective investors should note that the Fund utilizes long and short positions in both domestic and international fixed-income products, and may incorporate
leverage and derivative overlays. Fund performance may deviate significantly from benchmark indices shown.
Lawrence Park Asset Management Ltd. is registered with the Ontario Securities commission as a Portfolio Manager, Investment Fund Manager and Exempt Market Dealer. The Lawrence
Park Credit Strategies Fund is available in Canada to Accredited or Qualified Investors only. Please consult your advisor.
All return figures for the Lawrence Park Credit Strategies Fund (the “Fund” or “LPCSF”) are based on the A Series units and are net of management fees, performance fees,
trailing commissions (if any) and Fund expenses. Other series may have different fees and redemption terms. Monthly returns are based on monthly NAV calculations by RBC
Investor Services.
BGCI refers to the Barclays Global Corporate Index. Returns for this benchmark are calculated as excess monthly returns, or the difference between total returns of the security
and an implied Treasury portfolio matching the term-structure profile of that security. Returns are calculated in Canadian dollars, assuming currency exposures on non-Canadian
holdings are fully hedged. In the opinion of the portfolio managers, this index represents a valid benchmark for the Credit Strategies Fund on the basis it is a) based on a global
portfolio of publically traded corporate bonds, b) expressed in Canadian Dollars, and c) assumes currency and interest rate risk have been hedged from the portfolio.
The XCB is an index-based ETF that replicates the FTSE TMX Canada All Corporate Index, a benchmark index of Canadian Dollar corporate bonds published by PC Bond Analytics.
The Fund has a high % of its assets in C$ corporate bonds, and thus the FTSE TMX Canada All Corporate is a relevant index for comparing risk and return in the Fund. The FTSE
TMX Canada All Corporate Index has a high component of interest rate risk, whereas the Fund has a low component of interest rate risk.
Volatility and Sharpe calculations are based on monthly returns since inception, calculated by the Manager. The risk-free rate used for the Sharpe ratio calculation is 1.00%,
approximately equal to the average Canadian 3 month T-bill rate over the past 12 months. All comparisons to the benchmark are since inception of the Fund, March 1, 2012,
unless noted otherwise.
The Fund’s returns are not guaranteed, its value changes frequently, and past performance may not be repeated. No representations or warranties of any kind are intended or
should be inferred with respect to the economic return or the tax consequences from an investment in the Fund. Potential qualified investors should read the Fund’s offering
memorandum carefully prior to investing.
Ratings and Regional Breakdowns reflect the end of the month portfolio composition on a Total Exposure basis. Total Exposure is equal to the total directional long positions,
plus total directional short positions, excluding hedges & cash. Investors should note that because the portfolio is turned over frequently, current composition may differ
materially from the numbers stated herein.