David picton and Michael Mahoney, a pair of managers who cut loose from CI Mutual Funds Inc. to launch their own Toronto-based firm last November, are gathering momentum with their momentum-based money management strategy.

Operating under the name Synergy Asset Management, the managers have formed an independent firm that still enjoys the benefits of a strong relationship with CI.
Synergy’s largest client is CI, and several CI funds account for the lion’s share of its $2.4 billion in assets. But Synergy has also rustled up some new business. It manages 20% of Russell Canadian Equity Fund, providing its expertise on the growth portion of the portfolio. Synergy is also responsible for a portion of Frank Russell Canada Ltd.’s Sovereign investment program, and contributes to other wrap programs for RBC Dominion Securities Inc.

“We are looking for controlled growth; we are not wildly out there trying to increase our assets, as there are limitations to the momentum strategy in Canada,” says Picton, who carries the title of president and chief investment officer at Synergy, while his partner Mahoney is managing director.

“Momentum strategies require liquidity, and liquidity could be compromised if we had a tremendously large Canadian asset base.
We will likely be increasing our focus internationally and in the U.S.,” he adds.

The momentum style involves riding fast-changing trends in the market, and requires the ability to get on board while stocks are rising and jump off quickly when they run out of steam. Turnover is high, and Picton’s portfolios have historically turned over a couple of times a year. Synergy has a mandate to manage Canadian, U.S. and international stocks. Picton is in charge of the North American portfolios, while Mahoney — who cut his portfolio management teeth with Genus Capital Management Inc. and HSBC Asset Management Europe — oversees the international side.

Seven-member team

Synergy started with the original team of five who worked together at CI and previously worked at mutual fund management firm Synergy Asset Management Inc., an entirely different company founded several years ago by Joe Canavan. That latter company was acquired by CI in the fall of 2003. Since the launch of this new incarnation of Synergy Asset Management several months ago, a fourth analyst and a head of operations have been hired, bringing the team to seven, including the two founding partners.

Picton says that ever since CI took over the original Synergy in late 2003, the plan had been for the momentum investment group to establish an independent sub-advisory relationship. CI already had similar relationships with fund managers Bill Sterling, president of Trilogy Advisors LLC of New York, and Kim Shannon, president of Sionna Investment Managers Inc. of Toronto.
The idea was that once the dust settled on the acquisition, the momentum team would break off and set up shop independently.

“It was talked about from the beginning, and was an incentive for us to come over to CI after the takeover,” Picton says. “Once you have an entrepreneurial experience, it’s difficult to settle into a large company again.”

Picton came to Synergy via RBC DS at which he was a top-ranked analyst and head of quantitative research.

Picton and Mahoney called their firm Picton Mahoney Asset Management when it was first established as a legal entity, but changed it to Synergy Asset Management when they officially opened their doors for business last fall. The firm still maintains office space on CI’s premises and has access to CI’s administrative and compliance services.

“We can take advantage of CI’s economies of scale in terms of compliance issues, back-office and trading platforms,” says Picton. “It’s a tremendous benefit to have all the bases covered when you’re starting out, even with a firm of our size, as costs are going up dramatically.”

It terms of new business, Synergy is free to offer products on a retail basis or manage money for other retail operations, as long as it doesn’t put itself in direct competition with CI. That means managing money for another mutual fund company is out of the question.

All of the CI funds managed by Synergy can be identified by the Synergy name. The largest is the $1.3-billion Synergy Canadian Class Fund, which had a one-year return as of June 30 of 16.7%, making it a top quartile performer according to Morningstar Canada and putting it far ahead of the category’s median return of 11.7%. For the five-year period, the fund’s slim 3.9% gain lagged the median return of 4.8% and placed the fund in the third quartile.

@page_break@Some of the other funds, such as Synergy Tactical Allocation Fund and Synergy Global Style Management, incorporate a mix of management styles. With such “style diversified” funds, Synergy is the lead manager and large-cap growth specialist, but farms out the management of other components — such as value and small-cap growth and value — to other independent management firms.

Picton searches for investment holdings by employing a quantitative screening process that targets companies with revenue and earnings acceleration, earnings estimate revisions, positive earnings surprises and relative stock price strength. He then conducts fundamental analysis to determine why the companies are doing well, whether their momentum is sustainable and whether their valuations are reasonable in the context of growth prospects.

The final stage is a risk-control process, by which he assesses the entire portfolio to ensure adequate diversification among companies of various sizes and types, as well as across sectors.

Selling of holdings is triggered by the same criteria as buying, except in reverse.
Negative changes in earnings, revenue and
share prices trigger sell signals. As his research identifies both negative and positive momentum, Picton is toying with the idea of offering a hedge-fund product that can capitalize on short-selling opportunities.

“We’ve always emphasized portfolio diversification and style diversification, and hedge fund strategies have a role to play in a style- diversified portfolio,” he says.
IE