New fund lineup focuses on short-selling

Clients can switch freely among the offerings within the All-Weather corporate-class structure and defer any capital gains until the client exits the product family entirely.

“Our goal is to provide products that are not correlated to traditional, long-only investments,” says Jeff O’Brien, president of ONE Financial. “Our products are complementary to traditional mutual funds, and allow investors to diversify away from index returns without sacrificing long-term growth.”

Officially, the All-Weather funds and wraps are classified as commodity pools, which gives them more leeway than regular mutual funds to engage in strategies such as short-selling and leveraging. Regular mutual funds are required by law to keep their short-selling to less than 20% of net asset value (NAV). The All-Weather products achieve their long/short exposure primarily through the trading of derivatives contracts, exchange-traded funds, fixed-income securities, commodities and currencies. Although there are no restrictions on the type of client who can buy units in the All-Weather funds, the products can be sold only by financial advisors who have completed the Canadian securities course.

O’Brien, who previously had been a broker with RBC Dominion Securities Inc. in Toronto before he launched ONE Financial in 2001, says his experience with clients reveals they want positive returns every year. Clients are less interested in relative returns compared with an index – particularly in years when the index loses value.

ONE Financial was a pioneer in principal-protected notes (PPNs), but withdrew from that product line after 2008, when the combination of high market volatility and rock-bottom interest rates made it more difficult to manufacture a product offering principal guarantees and lock-in features on gains.

However, drawing upon some of the workable attributes of PPNs, the two All-Weather “protected portfolios” – Monthly ROC Income 2022 Protected Investment Pool and Conservative Growth 2022 Protected Investment Pool – offer a principal-protection guarantee at the maturity date of Dec. 15, 2022, based on the fund units’ original NAV of $15 per unit. Units in these portfolios, which require a minimum investment of $15,000, can be purchased and redeemed at any time until maturity at the current NAV. The monthly income pool provides a 5% annual income monthly, while the conservative growth pool reinvests its gains.

O’Brien says the All-Weather product family has the potential to produce higher risk-adjusted returns than competitors achieve because of the family’s ability to invest in four asset classes – stocks, bonds, commodities and currencies – as well as play from both the short and long sides of the market. Typically, clients stick to two main asset classes – stocks and bonds, he adds, and invest only on the long side.

@page_break@”Normally, investors need to be accredited to get their foot in the door with the kind of sophisticated strategies that cater to the high-end market,” says Rudy Luukko, investment funds and personal finance editor with Morningstar Canada in Toronto.

Going short at the right time requires an astute ability to read market signals and discern the differences between short-term blips and longer-term trends. O’Brien says this investment strategy is rooted in behaviourial economics; the portfolio manager uses a disciplined, systematic and repeatable process, measuring certain market metrics to gauge whether there is excessive optimism or pessimism in the market and then positions the portfolios accordingly.

“There is no actual stock-picking; it’s more a macro approach,” O’Brien says. “Depending on the attitude of the market, we will determine whether to jump off or on the train. We will be long or short on an entire market rather than on individual stocks or bonds.”

This strategy will be overseen by ONE Financial’s lead portfolio manager, Stuart Campbell, a seasoned trader with experience in the hedge fund industry as well as with National Bank of Canada. The All-Weather products can use leverage if deemed appropriate, but, O’Brien says, leverage will be held at a conservative level of less than two times the funds’ NAV. Risks also will be limited by putting stop-loss orders on every trade.

“The ability to go short is nothing without skill and knowing how to put the tools to use in a portfolio context,” says Dan Hallett, vice president and director of asset management with HighView Financial Group in Oakville, Ont. “The reality is that it’s extremely difficult to do well consistently in all kinds of markets in the long term, no matter what your strategy is.”

All funds within the All-Weather product family, even those specializing in equities and commodities, are designed to pay a healthy income stream that varies by fund. For example, All-Weather Profit Monthly Tax-Efficient Bond Fund provides a fixed monthly stream based on an annual rate of 7.5%. The balanced fund and the various equity funds specializing in Canada, the U.S., Asia and Europe, commodities and emerging markets offer investors the option of reinvesting their gains or choosing a regular income stream of either 6% or 9% annually. If the funds fail to generate these returns in any given year, the income will be paid by dipping into the investors’ own capital.

“We are pursuing healthy returns, but with lower volatility,” O’Brien says. “The annual yields have been set based on what we think the funds can bear without encroaching on capital.”

The All-Weather family’s structure allows it to create an income stream made up largely of tax-efficient return of capital and capital gains rather than fully taxable interest income.

“A lot of investors [are] chasing yield, increasing demand for traditional income-producing securities,” O’Brien says. “If interest rates rise, these traditional products could be vulnerable to downward pressure as investors sell.

“Due to our ability to go short,” he continues, “our funds could profit from interest rate increases and subsequent price declines in income securities.”

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