Marret High Yield Fund – Series A
As at May 31, 2015
FundServ Codes
Investment Objective
The Fund provides investors with (i) monthly tax-advantaged distributions, initially targeted to be $0.50 per Unit per
annum, representing a yield of 5% per annum on the initial subscription price, and (ii) a total return based on the
performance of a portfolio of primarily non-investment grade securities with a focus on delivering consistent positive
absolute returns while maintaining low correlations with recognized fixed income and equity index returns.
Series A MAI100
Series USD-A MAI400
Details
Investment Strategy
Date of Inception April 17, 2012
Management Fee Series A: 1.50%
Performance Fee 15% over 5% hurdle
Subscriptions/ Monthly (5 days notice)
Redemptions
Total Fund Assets $8,385,892.56
To achieve its objective, the Fund will have exposure to the Marret HYP Trust through a forward agreement. The Marret HYP
Trust intends to invest primarily in a broad range of public and private debt securities, both investment and non investment
grade, including corporate bonds and bank loans, government debt and convertible debentures. The Marret HYP Trust may
also invest in equity securities, such as common shares, preferred shares and warrants, and utilize other financial instruments,
including exchange traded funds and credit and/or index derivatives. The Marret HYP Trust may take both long and short
positions in portfolio securities, and will also make use of leverage in furtherance of these objectives and strategies.
Portfolio Performance (Series A Units):
NAV per Unit $9.34
HYF
Growth of $1,000
1300 $1,063
1250
1200
1150
1100
1050
1000
950
900
850
800
DEX Mid Corp.
Distributions
Latest Distribution Monthly
*Distribution Frequency $1.2500
Cash Distributions $1.2500
Since Inception
**Estimated Pre-Tax 7.64
Interest Equivalent Yield
12
*The monthly distribution is fixed but not guaranteed
and may be adjusted quarterly.
**based on NAVpu for Series A Units as at
May 31, 2015 and top marginal tax rates in Ontario
1 Mth
3 Mth
6 Mth
YTD
0.91
1.18
1.83
3.73
15
1 Yr
2 Yr
(annualized) (annualized) Inception
3.71
2.01
1.97
Compound Returns
(%)*
Fund
Portfolio Allocations
Net Exposure 91.72
Yield to Maturity 7.49
Yield to Worst 6.82
Current Yield 5.65
Yields noted above are for the total portfolio, including
cash *at May 31, 2015
Annual Risk/Return %
Annual Return (%)
14
*Based on the Opening NAV per Unit
Yield Information* (%)
20
HYF
15
Master II
Top Sectors
Basic Industry
Telecommunications
Energy
Media
Consumer Goods
Technology & Electronics
Healthcare
Leisure
Financial Services
Utility
Gvt / Other
(%)
27.68
18.16
11.35
10.89
7.09
5.52
5.26
3.75
3.24
1.78
5.27
Credit Rating Breakdown
BB
B
CCC
NR
(%)
38.51
32.74
9.76
18.99
Calculated as a proportion of gross invested capital excluding cash
10
Top Long & Short Holdings (%)
5
0
13
0
2
4
Risk (%)
6
Long
Cline Mining Corp 10% 15Jun2014
Sprint Nextel Corp 9% 15Nov2018 144A
MetroPCS Wireless Inc 6.625% 15Nov2020
Marret Resource Corp.
Sprint Corp 7.875% 15Sep2023
12.64
2.50
2.12
2.02
1.98
Short
iShares S&P/TSX Capped Energy Index ETF
First Quantum Minerals Ltd
(2.12)
(0.08)
Marret High Yield Fund – Series A
As at May 31, 2015
Marret High Yield Fund – May 2015
Recap
May was a mixed month across asset classes with large cap US stocks outperforming.
The S&P gained 1.29% (YTD 3.23%) while the TSX lost 1.22% (YTD +3.79). The broad
Merrill High Yield Index returned 0.30% (YTD 4.08%) while Canadian High Yield rose
0.38% (YTD 4.49%). Intermediate Term US Treasuries lost 0.05% (YTD +1.80%).
Commentary
While there were bouts of volatility in May, generally markets were quieter than expected.
With Greek debt deadlines, Fed rate hike scenarios, and oil volatility all potentially facing
markets, expectations of increased volatility was broadly anticipated. Whenever a view
becomes consensus then it’s likely something else will happen, and this was again true in
May. Probably the biggest surprise was the lack of volatility in equity markets worldwide
during the ongoing Greek debt restructuring talks. The market has taken the view that
regardless of Greek government grandstanding and Euro/German intransigence, in the
end they will complete some watered down deal that essentially pushes the problem out
into the future. There are many precedents for this view, nevertheless, it is surprising
that markets have not been affected by uncertainty in the normal manner this time.
Volatility did visit the US government bond market, however, as 10 year yields remain
very variable on a week to week basis. We see 10 year yields trading in a 2.10% - 2.40%
range with a bias for this range to shift higher as we get nearer to lift off for the Fed
Funds rate. Rates volatility is normal as the Fed begins a rate hike cycle, but what is
unusual this time is how volatile rates are relative to equities. In the long term equities
are the most volatile asset class and therefore provide the highest long term returns.
Economic data points so far this year have been on the weaker side (Q1 GDP revised to
-0.7%), which adds to the puzzle as to why rates are so volatile. We believe the answer
lies with many factors but mainly with the Fed talking about raising rates and trying to
get away from the zero level. Uncertainty around how quickly and how much the Fed
will raise rates leads to market volatility. The key Fed members, Yellen and Dudley, have
repeatedly talked about moving very cautiously while others are more hawkish, and the
published “dots” of where anonymous members expect rates to be are much higher.
History shows there are always negative surprises during rate hike cycles, and markets
continue to dislike uncertainty.
Volatility has also been increasing in the foreign exchange and oil markets. Foreign
exchange is related to interest rate policy, and oil is tied to production, inventories, OPEC
quotas and Middle Eastern politics. Surprisingly, the asset class where we are most
used to experiencing volatility, equities, is exhibiting the least, both on an absolute and
relative basis.
In this environment, high yield bonds are generally attractive and so far this year have
outpaced equities. We continue to view high yield positively, although the second half
may not be quite as good as the first. The economy continues to be positive, but not
strong enough to raise inflation materially and set the stage for larger rate hikes. Default
rates remain low, and the decline in oil prices is being mitigated by a wall of fresh capital
and many new secured debt transactions. We suspect that these will keep the default
rate increase in the energy sector below forecasts and support high yield bond prices. It
is possible that we will see further weakness in oil in the fall, but for now prices have
stabilized and defaults are low.
Our biggest concern on economic growth remains in the foreign exchange market,
specifically the US Dollar/Japanese Yen exchange rate. After stabilizing around 120¥
the USD has begun to rise again. Should it move quickly to 130 or above, it will have an
impact on non Japan Asian growth (like China & Korea whose currencies are tied to the
USD). It also will hurt US growth, especially if the USD/EUR moves along with the Yen.
This could lead to a situation where Asia and the US weaken while Europe isn’t yet strong
enough to grow without the benefit of good export markets.
There is no shortage of things to worry about in the financial world. However, our base
case remains that markets will experience higher volatility, but are unlikely to decline
to bear market levels. We favour equities and high yield, expect bond yields to rise
modestly, see oil as neutral with a downward bias in the fall, and think there is upside
for USD against JPY, EUR and the Canadian dollar. Our focus is defensive but not
aggressively so.
High Yield Statistics
Spreads and the yield on the BofA Merrill Lynch US High Yield Index were fairly steady
during May, both decreased around 10bps. There were some outflows during the month,
but they were concentrated in the first week. The rest of the month had flat to positive
flows in high yield. Default rates jumped to 2.0%, still well below historical averages.
Portfolio Overview and Positioning
The fund outperformed the index and had a positive return in May. The high yield portion
of the portfolio modestly outperformed the index while both our energy and treasury
positions added to returns. Given our similar positioning to the index during the month,
outperformance was largely generated by security selection and hedge positions. The
portfolio ratings positioning continues to be similar to the index while the spread, yield,
and duration are moderately below. Our cash position is similar to last month, and we
will still be very disciplined when redeploying that capital because of the laundry list of
things to worry about outlined above. We expect there will be bouts of volatility that will
present opportunities to become more aggressively positioned at better prices.
Initiated
Closed
Brocade Communications (debt)
CommScope (debt)
Wellcare Health Plans (debt)
Cliffs Natural Resources (debt)
Communications, Sales & Leasing (debt)
US Treasury 10 yr. (debt)
Windstream Corp. (debt)
Marret High Yield Fund – Series A
As at May 31, 2015
Explanatory Information
Performance Information
The indicated rates of return reflect changes to the net asset value of the Fund (the
“Fund NAV”) since inception, include the effect of distributions, are reported net of
management fees and operating expenses but do not take into account issue expenses,
sales, redemption, distribution or optional charges or income taxes payable by any
securityholder that would have reduced returns. The rates of return are not intended to
reflect future values or returns on investment in an investment fund. Investment funds
are not guaranteed, their values change frequently and past performance may not be
repeated.
Index Information
The “Master II” represents the Merrill Lynch U.S. High Yield Master II Index hedged to
CAD. The Master II Index is a broad-based index that tracks the performance of U.S.
dollar denominated below investment grade corporate debt publicly issued in the U.S.
domestic market. The Master II Index is calculated without the deduction of fees and
fund expenses, whereas the performance of the Fund is calculated after deducting such
fees and expenses.
Not an Offer to Sell
This document does not constitute an offering of any security, product or service, for
which an offer can be made only by its respective Offering Memorandum. This document
is for information purposes only, is confidential and may not be reproduced or distributed.
This document is qualified in its entirety by the Offering Memorandum, which should
be carefully read prior to investment in the Fund. The purchase of interests in a Fund
is suitable only for sophisticated investors who fully understand and are willing to
assume the risks involved in the Fund’s speculative investment program. The Fund’s
investment practices by their nature may be considered to involve a high degree of risk.
The Fund’s returns are not guaranteed and the value of the Fund may change frequently.
Past performance may not be indicative of future results. For a description of the risk
factors associated with an investment in a Fund, please refer to the related Offering
Memorandum. Marret cannot guarantee the accuracy of data provided above.
Forward-Looking Statements
Some of the statements contained herein including, without limitation, financial and business prospects and financial outlook may be forward-looking
statements which reflect management’s expectations regarding future plans and intentions, growth, results of operations, performance and business
prospects and opportunities. Words such as “may,” “will,” “should,” “could,” “anticipate,” “believe,” “expect,” “intend,” “plan,” “potential,” “continue”
and similar expressions have been used to identify these forward-looking statements. These statements reflect management’s current beliefs and are
based on information currently available to management. Forward-looking statements involve significant risks and uncertainties. A number of factors
could cause actual results to differ materially from the results discussed in the forward-looking statements including, but not limited to, changes
in general economic and market conditions and other risk factors. Although the forward-looking statements contained herein are based on what
management believes to be reasonable assumptions, we cannot assure that actual results will be consistent with these forward-looking statements.
Investors should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date hereof and we
assume no obligation to update or revise them to reflect new events or circumstances.
Marret Asset Management Inc. 200 King Street West, Suite 1902, Toronto, ON M5H 3T4 416-214-5800 I www.marret.com
1506-0928-2_E (05/15)