Sprott Strategic Fixed Income Fund
Co-Chief Investment Officer; Senior Portfolio Manager
Co-Chief Investment Officer; Senior Portfolio Manager
Scott joined Sprott Asset Management LP in March 2010 and brings over 24 years of global fixed income and currency market experience to the firm. Earlier in his career, Scott was senior Vice President and Portfolio Manager at AGF Funds Inc. where he managed all fixed income mandates and co-managed the balanced funds. Scott was also a managing director and partner at a Canadian hedge fund focusing on global fixed income and currency management. Prior to joining Sprott, Scott was a Senior Portfolio Manager at TD Asset Management, where he was part of the team responsible for $30 billion of fixed income portfolios.
Scott began his career at the Bank of Canada where he worked in both research and trading, which assisted in the execution of monetary policy. He is a four-time winner of the Best Foreign Bond Fund at the Morningstar Canadian Investment Awards.
Scott is a CFA Charter holder and has an MBA from University of Toronto and an Honours BA from Queens University.
Michael Craig joined Sprott Asset Management LP in May 2010 and brings 12 years of experience developing fixed income analytics, tactical asset allocation and fixed income management. Earlier in his career, Michael worked at Phillips, Hager and North, where he developed the analytics and research systems used by the fixed income team.
Prior to joining Sprott Michael was a Vice President at TD Asset Management. There, he co-managed over $11 billion in assets for various asset allocation programs, and led the portfolio analytics group.
Michael obtained his Masters in Financial Risk Management from Simon Fraser University (2006) and his Bachelor of Commerce from the University of British Columbia (1999). Michael is a CFA charterholder.
Ben joined Sprott Asset Management LP in May 2011 as an Associate Portfolio Manager and was appointed Portfolio Manager in April 2013. He has over ten years of experience in bond and credit analysis. Ben began his career at DBRS as a credit analyst where he analyzed bonds for various industries across the credit spectrum. Most recently, he was a Vice-President at TD Asset Management. There, he was a member of the team responsible for all of the firm’s active high yield assets, including the TD High Yield Bond Fund. From 2006 to 2008, Ben was an Investment Analyst at CI Investments Inc. where he was part of a team that managed all active high yield fixed income assets in the Signature Funds group.
Ben is a CFA charterholder and obtained his Bachelor’s degree from the University of Western Ontario.
|Issue Price||$10.00 per unit|
|Distributions||Monthly Tax Advantaged|
|Type of Fund||Closed-end Fixed Income|
|Performance Fee||15% over 3-month Canadian Bankers Acceptance Rate + 3.8%|
|Eligible for Registered Plans||Yes|
0.50% p.a., paid quarterly
Fund Objectivei. Maximize absolute total returns to holders of Units (the "Unitholders") with lower volatility relative to traditional, long only bond funds; and ii. Provide Unitholders with monthly tax-advantaged distributions.
Fund Performance as at April 30, 2013
|MTD*||YTD*||1 YR||3 YR||5 YR||10 YR||Inception1
1 Performance since inception does not take into account $0.56 per share, or 5.6% of the inception NAV, in agency and issue fees incurred at the launch of the Fund.
Going into 2013, we had braced ourselves for a bit of turbulence due to the strong rally of 2012 and concerns around the U.S. “Fiscal Cliff” and Europe. As it turned out, while problems did resurface out of Europe, the Fiscal Cliff issue was delayed and the economic data out of the U.S. was fairly strong. As a result, we began to see growth expectations, and correspondingly risk appetites, decouple across different regions. The North American markets became more optimistic around a recovery, while the European and Emerging markets were a bit more subdued.
China is one area of the world where growth is clearly decelerating, and few countries are more concerned about this than Japan. The Japanese economy has been struggling for nearly two decades due to challenging demographics and burdensome debt levels, and a slowdown of one of its largest trading partners would only exacerbate their problems. After taking office in late December of 2012, Japan’s new Prime Minister Shinzo Abe vowed to “do whatever it takes” to restore economic growth and inflation in the country. He followed this up by replacing the incumbent BOJ governor with well-known inflation advocate Haruhiko Kuroda, who has since launched a quantitative easing program in Japan that makes Ben Bernanke’s efforts look mild in comparison. We started building a bearish position in the Yen late 2012, which worked in our favor early in the quarter but moved against us in February when the markets became nervous. Kuroda’s large QE announcement came after quarter end and while the Yen has sold off dramatically in April, we expect further Yen weakness in the near term.
Outside of the Yen, our funds had mixed results from our foreign exchange positions in the quarter. Our bearish CAD bias performed well for us as both employment and GDP data out of Canada has been disappointing. On the other hand, one of our largest positions, long EUR/CHF cross, underperformed despite rallying significantly in January, as events in Cyprus and Italy caused capital to flee the Euro and into the Swiss Franc. We have since cut down our EUR/CHF exposure but we continue to like this trade.
In rates, we found our biggest opportunity to be in the UK, where the market had gotten overly bearish on inflation prospects. With growth in Britain stagnated by both private and public sector deleveraging and overall weakness in the Eurozone, UK inflation breakevens fell to their lowest level in nearly three years last summer. We went long UK breakevens and took profits on this trade in the first quarter as breakevens rallied from early signs of a recovery and a decision to maintain a positively biased calculation of the retail price index.
Our credit portfolio continued to perform well to start 2013, led by strong returns in high yield bonds. We had one of our largest positions, a convertible bond in Sea Trucks, get called at a 20% premium to trading levels. Sea Trucks is an oil and gas services company that operates primarily in the North Sea and Africa. Our bonds were secured on a second lien basis and had a high coupon that rose periodically until maturity (2015). At the time of the call, our bonds had a coupon of 13%, which was set to rise to 14% in July if the company had not called them.
We have maintained our sizeable allocation to high yield bonds during the quarter. While the index continues to make new all-time lows in terms of yield (YTW is under 5.5% as of writing), the spread at 470 bps still represents relatively attractive returns when compared to treasuries and investment grade corporates. With corporate balance sheets remaining generally conservative and the funding environment continuing to benefit from quantitative easing programs of central banks globally, it is difficult to envision a spike in default rates in the near future.
The Strategic Fixed Income Fund finished the quarter relatively flat, with a total return of 0.11%. Our bias entering the quarter was fairly neutral, with a few thematic and high conviction trades in the EUR/CHF cross, USD/JPY cross, and UK breakevens overlayed on top of our broader long credit and relative value positions.
Problems out of Italy and Cyprus renewed fears around the banking system in Europe, causing a flight of capital out of European system and into more perceived safe havens such as the USD and Swiss Franc. Meanwhile, the Yen caught a mild bid towards the end of the quarter as the sell-off appeared extended and the markets became nervous about what Kuroda would say when he stepped into office. As a result, our profits in short Yen and credit were largely offset by the underperformance in EUR/CHF in the quarter.
It is worth noting that both the EUR/CHF and USD/JPY crosses have since moved sharply in our favour, resulting in strong gains for the Fund in the first 3 weeks of April. We have pared down our exposures to these trades but continue to see good value at current levels.
The indicated rates of return for series A/class A securities of the Funds are based on the historical annual compounded total returns including changes in unit/share value and reinvestment of all distributions or dividends and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Funds.