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Posted by Sandy Liang on Oct 21st, 2020

The Anatomy of an Award-Winning Credit Fund

The investment team at Purpose Investments is honoured to win the 2020 Canadian Hedge Fund Award for best three-year performance in the Credit Focused category. It’s the third consecutive year we’ve taken home some hardware from the CHFAs. We also were honoured with other nominations, including one-, three- and five-year returns, and one-, three- and five-year Sharpe ratio.

Three straight years of awards is a powerful affirmation of the work we do on behalf of our clients and investors. Over the life of the Fund, we have maintained a strict adherence to our process.

Growth chart of Purpose Credit Opportunities Fund Series F since June 2014

During the measurement period from June 2017 to June 2020, the Fund returned 19.3% on a cumulative basis and 6.06% annualized. Since inception in June 2014 to September 2020, the Fund has returned 69% on a cumulative basis and 8.6% annualized – a period that has included three downturns including 2015, 2018 and 2020. The Fund has not had a negative return in any calendar year.

We know investment returns are important to clients, but how those returns are generated and how risk is managed is crucial too. We are fundamental, absolute-return investors who conduct extensive research into our investments and themes. Our insights come from decades of experience across multiple cycles and countless deep-dive meetings and site tours with company management. We think like lenders so that we can invest like lenders, which includes confirming the details on the ground.

As investors, we do a lot of work to ensure that the risk/reward ratio makes sense for our clients. We do this with every investment decision. And we do it by applying the thinking across a potential investment’s entire capital structure.

Because of this discipline, we can confidently say we are taking on significantly less risk than investors take in typical equity strategies. But the numbers show this less risky approach doesn’t impede returns. Our absolute-return strategy, centred on corporate debt, allows us to deliver equity-like returns with significantly less risk.

We firmly believe our team’s fundamental approach to credit is particularly relevant today as we look forward into 2021 and beyond. The COVID-19 pandemic has thrown all investors for a loop, but also allows us to re-examine our strategy. As we gaze over the horizon, we are even more clear in the belief in our approach.

Global interest rates are at their lowest level in the history of mankind. This is not an exaggeration. Traditional fixed income, such as government bonds and corporate debt with high credit ratings, has had the benefit of a 40-year bull market as interest rates declined and pulled forward investment returns from the asset class. From here, negative bond yields around the world and near-zero yields in Canada and the US guarantee tepid returns for investors, at best. Investors face significant capital risk if interest rates ever go the other direction.

As an aside, the current situation has come about because the world’s central banks, including the US Federal Reserve Bank and the Bank of Canada, have acted in unison to take short-term interest rates down to zero or lower. They have used quantitative easing to lower long-term interest rates through buying long bonds. Higher bond prices mean lower bond yields – a reality that is especially difficult for retirees and savers.

There is no longer such thing as a risk-free rate of return and definitely no such thing as risk-free income. In this environment, alternative fixed income investments, like Purpose Credit Opportunities Fund, are essential tools for achieving long term investment goals.

The notion of research-driven, fundamental investing can seem quaint to some these days. We think our results speak for themselves and vividly show our approach is not only relevant, but important for driving returns.

On a personal note, my investment role models are mostly people that aren’t mentioned as often anymore in the press. You’re more likely to hear about the latest Bitcoin zillionaire, SPAC principal or tech stock savant. But some of my most-revered investment tomes are from famed long-term investors, such as Peter Lynch, Warren Buffett and Howard Marks. Dissections of boom/bust strategies, including When Genius Failed by Roger Lowenstein and House of Cards by William Cohan have also been an inspiration. The people I’ve worked directly with have been crucial, as well.

I owe a deep gratitude to the successful investors whom I was connected with during my time at Bear Stearns in the 2000s and my subsequent time as a principal investor at Cobalt Capital, the New York-based hedge fund turned family office.

Cobalt is run by Wayne Cooperman, an extremely successful investor. One of his mantras includes, “getting to the finish line,” which describes the point where due diligence sufficiently weighs both risk and reward. The result is conviction in the investment thesis.

The concept seems obvious, but it must be embedded in a team’s process and culture to see benefits in long-term performance. At Purpose, our credit team’s framework incorporates that finish line, a margin of safety and we constantly check to ensure we are thinking like lenders. Once again, the Canadian Hedge Fund Awards have validated our framework.

— Sandy Liang, CFA, MBA is the lead portfolio manager of Purpose Credit Opportunities Fund. He also manages Purpose Strategic Yield Fund and Purpose Canadian Preferred Share Fund.

All data sourced to Bloomberg unless otherwise noted.

The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained on this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice and neither Purpose Investments Inc. nor is affiliates will be held liable for inaccuracies in the information presented.

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. The indicated rate of return is the historical annual compounded total return including changes in share/unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

Fund mentioned in this story

Sandy Liang, CFA

Sandy has been managing investments on the “buy side” since 2008 following a 17-year career as a credit and equities analyst on the “sell side” working in both Toronto and New York. He was a member of the Institutional Investor Magazine All-America Fixed Income Research Team for his work covering high yielding debt securities at Bear, Stearns & Co. for seven consecutive years from 2001 to 2007. As the portfolio manager of Purpose Credit Opportunities Fund, Sandy has won a Canadian Hedge Fund Award for performance in the Credit Focused category for three straight years in 2018, 2019 and 2020. Sandy is also a Morningstar 5-Star Fund Manager.