Sprott Absolute Return Income Fund

Transcription

1 November 2014 Scott Colbourne, MBA, CFA Co-Chief Investment Officer; Senior Portfolio Manager Michael Craig, CFA, MA Portfolio Manager Ben Chim, CFA Portfolio Manager

2 Disclaimer is the investment manager to the Sprott Funds (collectively, the Funds ). Important information about these Funds, including their investment objectives and strategies, purchase options, and applicable management fees, performance fees (if any), and expenses, is contained in their prospectus or offering memorandum. Please read these documents carefully before investing. Commissions, trailing commissions, management fees, performance fees, other charges and expenses all may be associated with investing in the Funds. The indicated rates of return for class A securities of the Funds for the period ended October 31, 2014 are based on the historical annual compounded total returns including changes in unit 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. The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction. (the Fund ) is generally exposed to the following risks. See the offering memorandum of the Fund for a description of these risks: general investment risk; limited operating history; class risk; no assurance in achieving investment objectives or distributions; changes in investment objective, strategies and restrictions; limited ability to liquidate investment; redemptions; unitholders not entitled to participate in management; market call; reliance on the manager; dependence of the manager on key personnel; potential indemnification obligations; liability of unitholders; lack of independent experts representing unitholders; no involvement of unaffiliated selling agent; use of a prime broker to hold assets; not a public mutual fund; charges to the fund; valuation of the fund investments; taxation of the fund; general economic and market conditions; liquidity of underlying investments; fixed income securities; equity securities; commodities; currency risk; foreign investment risk; derivative instruments; trading costs; short sales; securities lending, repurchase and reverse repurchase transactions; leverage; concentration; liquidity; hedging; indebtedness; illiquidity; suspension of trading. 1

3 Agenda Fund People Philosophy Process Portfolio 2

4 Long/Short Income Solution* Fund Benefits: 1. Institutional bond strategy Cornerstone Capital experience 2. Well-suited for inflation-sensitive investors a real return focus 3. Ideal complement to traditional bond funds 4. Flexible investment strategy 5. Floating rate hurdle: 3-month Canadian Dealer Offered Rate + 3% Proxy for inflation +3% 6. Ability to use currencies and short selling to enhance returns * For accredited investors only. 3

5 Sprott Fixed Income Team Experienced Fixed Income Team Scott Colbourne, CFA, MBA Co-Chief Investment Officer; Senior Portfolio Manager Former lead manager of the TD Global Bond Fund, co-manager of the TD Canadian Core Plus Fund and a member of the team responsible for $30 billion of fixed income portfolios ( ) Head of Fixed Income at AGF ( ) AGF Global Government Bond Fund (co-lead PM ( ), Lead PM (2005) Best Foreign Bond Fund, Morningstar Canadian Awards, Partner and Managing Director, Cornerstone ( ) Global Fixed Income Currency Hedge Fund Extensive experience managing fixed income and foreign currency portfolios over 25 year career For details of the awards, please see Scott Colbourne Co-Chief Investment Officer; Senior Portfolio Manager 4

6 Sprott Fixed Income Team Experienced Fixed Income Team Michael Craig, CFA, MA Portfolio Manager At TD Asset Management, Michael was the co-manager for over $11 billion of assets for various asset allocation programs ( ) Led the development of a leading portfolio analytics platform in Canada at TD Asset Management Built the analytics platform for Phillips, Hager & North Michael Craig Portfolio Manager 5

7 Sprott Fixed Income Team Experienced Fixed Income Team Ben Chim, CFA Portfolio Manager Former member of TD Asset Management ( ). Member of team responsible for all of the firm s active high yield assets, including TD High Yield Bond Fund Investment Analyst, CI Investments Inc. ( ) Credit Analyst, DBRS ( ) Ben Chim Portfolio Manager 6

8 The Foundation Sprott Approach Flexible Opportunistic Global Absolute Returns Ability to Short VS. Typical Canadian Bond Manager Category Focused Limited Investment Universe Domestic Focus Relative Returns Long Only 7

9 What does this mean for advisors and investors? Our solutions complement low cost fixed income solutions Core: GoC Bonds, GICs, Ladders Add: Absolute return, unconstrained funds, credit focused funds Diversifies alpha, protects against inflation and enhances income Non-Core/ Alpha Core Fixed Income Fixed Income Allocation The foregoing information is for illustrative purposes only and should not be construed as a representation concerning the future composition or diversification of this Fund s portfolio. 8

10 Proven Investment Process 1. Fundamental Analysis 5. Risk Management 2. Quantitative Analysis Research Driven Fundamentals Analysis Absolute Return Focus 4. Portfolio Management 3. Trade Construction 9

11 Investment Process 1) Fundamental macro economic outlook determined by: Internal research: Sprott economic discussions, macro economic trends, central bank pricing, surprise indices, proprietary analytics, real rates and market sentiment and positioning and consensus analysis External research 2) Statistical analysis of bond and currency markets: Screens: regression analysis, forward yield curve analysis, bond yield technical statistics, mean reversion and butterfly analysis 10

12 Investment Process 3) Trade construction Define subjective probabilities of upside and downside, entry point, exit point on a trade by trade basis Establish strict stop loss Use historical and implied volatility to calculate reward risk ratio attractiveness Recommend trade size based on confidence and marginal risk contribution to the portfolio 4) Portfolio construction and risk allocation Risk capital is allocated utilizing our macro economic outlook. 11

13 Investment Process 5) Portfolio maintenance Maintain a strict and disciplined approach to risk management and portfolio re-balancing Daily/hourly P&L summary MTM gains/losses vs. carry Portfolio DV01 calculation (sensitivity to interest rates) 12

14 Approach Yield Curve* Relative Markets* Corporates Credit* Duration Government & Cash Currencies Real Rates* Collateral Portfolio Duration < 2 years Strategy *Duration Neutral Strategies The foregoing information is for illustrative purposes only and should not be construed as a representation concerning the future composition or diversification of this Fund s portfolio. 13

15 Long/Short Fixed Income Trading Strategies Strategy Description Example Yield Curve* Credit* Relative Markets* Real Rates* Currencies Duration Long/short investment in government bonds with different maturities based on whether the yield curve is flattening or steepening (duration neutral pairs trade) Purchase a corporate bond and sell a government bond of similar maturity to isolate credit spread (duration neutral pairs trade) Invest in a government bond of one country and short a bond of another, based on Manager s expectations as to the future timing of interest rate movements in each country (duration neutral pairs trade) Simultaneous purchase and sale of nominal and real return government bonds based on Manager s expectations re future inflation (duration neutral pairs trade) Invest in currencies both to mitigate Portfolio risk and to enhance returns; provided that the Fund s exposure to foreign currencies will not exceed 30% Purchase or sell government bonds based on Manager s expectations as to the future direction of interest rates Curve flattener. Sell 2 year bonds, buy 10 year bonds. Buy 10 year Canadian Western Bank bond, sell 10 year Government of Canada bonds. Buy Government of Canada 10 year, sell US Treasury 10 year. Buy Canada RRB 30 year, sell Canada 30 year nominal. Buy Cdn $, sell US $ Sell 10 year Government of Canada * Duration Neutral Strategies 14

16 Long/Short Fixed Income Trading Strategies Yield Curve* Credit* Relative Markets* Real Rates* The Strategies The fund allocates capital based on its assessment of anticipated market opportunities and expected risk reward profile. Five out of the six strategies are pairs or relative value trades (ie. long one bond or currency vs. another) Currencies Duration * Duration Neutral Strategies 15

17 Yield Curve The yield curve is the difference between two maturity points. For example, this graph shows the yield difference between the 10 year Government of Canada bond and the 2 year Government of Canada bond. For illustrative purposes only. Source: Bloomberg 16

18 Yield Curve The strategy is to take advantage in the movement of yield curve and whether the yield curve is flattening (a smaller number) or steepening (a wider number). As monetary policy is normalized by removing the emergency rate setting globally the fund can invest in the yield curve flattener in Canada and other countries. A curve flattener is executed by selling 2yr Government of Canada bonds and buying 10yr Government of Canada bonds on a duration weighted basis. In this case if you sold $46.0 million two year bonds and bought $10.5 million ten year bonds, you would make $10,000 for every 0.01% move in the yield curve. 17

19 Credit Spread transactions By simultaneously buying a corporate bond and selling a government bond with the same term to maturity, the investor captures the incremental yields spread with very little duration (or interest rate) risk. An example would be buying Brookfield Asset Management yielding 5.15% and selling a Canadian government bond yielding 3.20% and the gain to the investor is 2.04% For illustrative purposes only. Source: Bloomberg 18

20 Relative Market A relative market trade is the simultaneous purchase and sale of two securities in two different bond markets. For example, this graph shows the difference between 10 year yield in US and the 10 year yield in Germany. For illustrative purposes only. Source: Bloomberg 19

21 Relative Market The strategy is to take advantage in the different movements in interest rates between two countries at different points on the yield curve US 10 year yields have underperformed German 10 year yields This trade has been executed by buying 10yr German Government Bunds and selling 10yr U.S. Government Treasuries In this case if you bought 8.375M German 10 year bunds and sold $11.0M US 10 year treasuries, you would make $10,000 for every 0.01% move in the yield spread 20

22 Real Rates Strategy A real rate trade is a strategy that focuses on changes in inflation expectations in the bond market. The trade is executed through the simultaneous purchase/sale of nominal government bonds and the sale/purchase of government inflation linked bonds. The differential is referred to as the break-even inflation rate and is an important measure of the bond markets assessment of inflation expectations. For illustrative purposes only. Source: Bloomberg For example, in this graph, inflation expectations have increased so it would have been advantageous to be long inflation linked debt and short government debt. 21

23 FX An investment in a currency trade is simply the simultaneous purchase and sale of different currencies. The intention is to benefit from changes in risk tolerance, changes in interest rates and other variables. Any currency pair can be traded but generally the most liquid pairs are traded such as Eur/US$ and the C$/US$ For illustrative purposes only. Source: Bloomberg 22

24 Duration A duration trade is the investment in Government of Canada debt with the expectation of interest rates either moving higher or lower. For example, an investor could sell the ten year Government of Canada bond and benefit as interest rates increase. For illustrative purposes only. Source: Bloomberg 23

25 Monthly Returns Since Inception (%) JAN FEB MAR APR MAY JUN JUL AUG SEPT OCT NOV DEC YEAR CDOR +3 Value added Compounded Returns (%) 1 MTH 3 MTH 6 MTH 1 YR 3 YR INCEPTION CDOR All returns and fund details are a) based on Class A units; b) net of fees; c) annualized if period is greater than one year; d) as at October 31, Value added represents the difference between the Fund and the Index performance in the respective calendar year. CDOR+3 is the 3-month Canadian Bankers Acceptance Rate (Canadian Dealer Offered Rate) plus 3%. 24

26 4% Monthly Returns 3% 2% 1% 0% -1% -2% -3% -4% -5% * Sprott Strategic Fixed Income Fund -6% 25 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 *Class A As at October 31, 2014

27 Top 10 holdings (% NAV) US Treasury N/B, 2.375%, 08/15/ % Tim Hortons Inc., 2.85%, 04/01/ % Government of Canada, 1%, 11/01/15 9.7% US Treasury N/B, 3.125%, 08/15/44 5.0% Unique Pub Finance, 6.542%, 03/30/21 5.0% Eksportfinans ASA, 2.375%, 05/25/16 4.1% Sprott Strategic Fixed Income Fund 3.9% Eksportfinans ASA, 2%, 09/15/15 2.3% Catlin Insurance Co Ltd., 7.249% - Perpetual 2.3% Nationwide Building Society, 10.25%, Perpetual 2.2% Top 10 holdings (% VAR)* Long USD / Short AUD 23.4% Long USD / Short CAD 17.1% Long USD / Short ZAR 11.8% Short EURCHF 5Y Vol 10.9% Long US High Yield 10.8% Columbia 3Yr- 10Yr Steepener 5.7% Long PLN / Short HUF 4.6% Long CLP / Short COP 3.7% Long INR / Short EUR 3.2% Long USD / Short TRY 2.4% *Note that this represents the incremental VaR for each position. The top 10 positions can add up to more than 100% due to the presence of diversifiers As at October 31,

28 Monthly Performance Attribution -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% Actual 1.50% Fees/Other 0.16% Relative Market 0.00% Duration 0.90% Real Rates Yield Curve FX 0.00% 0.04% 0.16% Credit 0.35% Collateral 0.03% Equity -0.16% As at October 31,

29 Funds Managed Scott Colbourne Portfolios managed and/or co-managed: Sprott Strategic Fixed Income Fund (2011-present) Sprott Diversified Yield Fund (2010-present) (2010-present) Sprott Short-term Bond Fund (2010-present) TD Global Bond Fund ( ) TD Canadian Core Plus Bond Fund ( ) Cornerstone Capital LP ( ) AGF Canadian Bond Fund ( ) AGF Canadian High Yield Bond Fund ( ) AGF Global High Yield Bond Fund ( ) AGF Global Government Bond Fund ( ) AGF RSP Global Bond Fund ( ) AGF Real Value Balanced Fund ( ) Michael Craig Portfolios managed and/or co-managed: Sprott Strategic Fixed Income Fund (2011-present) Sprott Diversified Yield Fund (2010-present) (2010-present) Sprott Short-term Bond Fund (2010-present) TD Managed Asset program ( ) TD Fund Smart program ( ) TD Advantage Investment portfolios ( ) Ben Chim Team member: Sprott Strategic Fixed Income Fund Sprott Diversified Yield Fund Sprott Short-term Bond Fund TD High Yield Bond Fund ( ) TD Core Plus Bond Fund ( ) TD Corporate Bond Capital Yield ( ) TD Global Bond Fund ( ) 28

30 Fund Codes Alternative Strategies Class A Class T Class F Class FT SPR220 SPR520 SPR320 SPR620 29

31 Contact Information Royal Bank Plaza, South Tower 200 Bay Street Suite 2700, PO Box 27 Toronto, ON M5J 2J1 T: Toll Free: F: Web: Follow us on 30 30

32 Sprott Funds Summary MUTUAL FUNDS EQUITY Sprott Canadian Equity Fund Sprott Canadian Equity Class Sprott Enhanced Equity Class Sprott Small Cap Equity Fund SECTOR EQUITY Sprott Global Agriculture Fund 1 Sprott Global Infrastructure Fund 2 Sprott Timber Fund 3 Sprott Energy Fund Sprott Gold & Precious Minerals Fund Sprott Gold & Precious Minerals Class Sprott Real Asset Class Sprott Resource Class Sprott Silver Equities Class BALANCED Sprott Enhanced Balanced Fund Sprott Enhanced Balanced Class Sprott Tactical Balanced Fund Sprott Tactical Balanced Class FIXED INCOME Sprott Diversified Yield Fund Sprott Diversified Yield Class Sprott Short-Term Bond Fund Sprott Short-Term Bond Class BULLION Sprott Gold Bullion Fund Sprott Gold Bullion Class Sprott Silver Bullion Fund Sprott Silver Bullion Class ALTERNATIVE STRATEGIES EQUITY Sprott Bull/Bear RSP Fund Sprott Hedge Fund L.P. Sprott Hedge Fund L.P. II Sprott Enhanced Long-Short Equity Fund L.P. Sprott Enhanced Long-Short Equity RSP Fund Sprott Small Cap Hedge Fund SPECIALTY INCOME/CONVERTIBLE BONDS Sprott Convertible Strategies Trust* Sprott Private Credit Trust Sprott Bridging Finance Income Fund L.P. 4 1 Formerly Exemplar Global Agriculture Fund. Effective March 31, 2014, became the successor manager to the fund. 2 Formerly Exemplar Global Infrastructure Fund. Effective March 31, 2014, became the successor manager to the fund. 3 Formerly Exemplar Timber Fund. Effective March 31, 2014, became the successor manager to the fund. 4 Formerly Bridging Credit Fund LP. Effective July 25, 2014, became the successor manager to the Fund. * Effective October 31, 2013, the investment objective, strategies and restrictions of the Fund have materially changed. Please refer to the Offering Memorandum for more information. 31