Q: What is the relationship between Trapeze Asset Management Inc. (TAMI) and Trapeze Capital Corp. (TCC)?
A: TAMI and TCC are affiliated companies. TCC is a Canadian investment dealer, founded in 1998. TAMI and TCC share senior management and other personnel, and occupy the same office premises. Both TAMI and TCC offer portfolio management services for high net worth individuals and the two organizations exchange research ideas and strategies.
Pursuant to your investment counsel agreement with TAMI, we will open an account in your name at TCC, as dealer. TAMI uses TCC exclusively for trade execution and other brokerage services.
Q: Who manages client accounts?
A: We have a team of experienced portfolio managers, one of whom will discuss your objectives and circumstances with you to assess the appropriate asset allocation and investment mandate(s) for your account(s), and will maintain a direct relationship with you. In most cases, the investment and trading decisions for our managed accounts are made centrally by TAMI’s co-founders, Randall Abramson and Herbert Abramson, with the support of our other portfolio managers and research analysts.
Q: Do you have minimum investment requirements?
A: The minimum required to open a managed account with Trapeze is $500,000, which may be aggregated among a number of accounts within the same family, e.g., personal accounts, registered plan accounts and corporate accounts.
Q: Do you manage each client's account separately or do you pool accounts?
A: Although we generally manage each client’s account separately (i.e., direct holdings of individual securities), from time to time that may not be ideal for a particular account. For example, for a client with a small registered plan account, in order to receive the same asset diversification benefits and to achieve cost benefits, we may invest all or a portion of the client’s account in one or more pooled funds or mutual funds managed by us, provided the account is eligible for investment in such funds and each fund’s mandate matches the client’s objectives.
Q: What do you mean by focused, high conviction portfolio?
A: We invest client funds in portfolios which are focused, high conviction selections of securities influenced by our macro perspectives and may be concentrated in certain securities, sectors and jurisdictions depending on their attractiveness. We seek to emphasize our best ideas. We have since our inception held large positions in the energy sector, holding oil and gas positions which have represented as much as 60% of the overall portfolio. Similarly, we have held positions in gold stocks which have represented as much as 20% of the overall portfolio. These sector allocations were a result of our macro analysis that led us to over-weight the sectors based on our outlook for inflation, supply-demand fundamentals and prices for commodities, and a desire to invest in companies with hard or physical assets. This macro outlook was coupled with bottom-up stock selection where we had discovered many attractive investment opportunities within the same sector. Notwithstanding, we would typically not exceed 20% concentration in particular sectors such as: financials, technology, consumer discretionary, health care or other sectors where companies do not hold hard assets.
Since portfolios may be concentrated in a relatively limited number of investments or market sectors, the portfolio’s returns could be adversely affected by the performance of particular investments or market sectors.
We may also emphasize small to mid-cap companies when we believe they offer a significantly better risk-reward opportunity than larger companies. Often, illiquidity from an emphasis on small-cap companies can contribute unduly to an outsized short-term fluctuation in price.
Q: Where are client assets custodied?
A: Assets are held in client name at major financial institutions. All cash and securities of our Canadian and U.S. clients (except IRA accounts) are custodied by Fidelity Clearing Canada ULC (“Fidelity”), TCC’s “carrying” broker. Fidelity is an indirect, wholly-owned subsidiary of FMR LLC. FMR LLC and its subsidiaries, including Fidelity, conduct business under the “Fidelity Investments” name throughout the United States and Canada and collectively comprise one of the world’s largest providers of financial services.
All cash and securities of IRA accounts are custodied by U.S. Bank Institutional Trust & Custody, a division of U.S. Bank National Association, a subsidiary of U.S. Bancorp. U.S. Bancorp is one of the largest financial holding companies in the United States. IRA accounts incur custodial fees at favourable rates negotiated by us with the custodian.
Q: How do you use short selling?
A: A short sale is a sale of a security not owned but borrowed from a holder and subsequently returned to that holder when it is repurchased in the market. The short seller profits if the repurchase price of the security is below the initial sale price.
For long/short accounts we can short sell stocks which are overvalued relative to their fair market value and/or have poor or deteriorating fundamentals, such as an overleveraged balance sheet, diminished growth expectations and/or a low return on capital. Short selling potentially enables us to realize a return, but also to potentially hedge or insulate our long positions in down or volatile markets where our outlook for the market or a particular sector is negative.
Q: What are your option strategies?
A: We may use options strategies for hedging or investment purposes to the extent such strategies are appropriate and permitted for a client’s account. We can use options to invest indirectly in securities or financial markets, and provide downside protection to the portfolio where we anticipate a bear market or changes to exchange rates. For example, we can sell put options to earn premiums to lower effective purchase prices (at a strike price where we would want to purchase a security in any event) or sell call options on securities we already hold to earn premiums to increase effective selling prices (at a strike price where we would want to sell or short sell a security in any event). We may also use options to initiate synthetic long or short positions with a view to maximizing risk-adjusted portfolio returns. We may apply our proprietary methodologies to these strategies by using put or call options with strike prices that are at or near floors or ceilings in our work.
Q: Do you use leverage?
A: Our managed accounts may use margin judiciously from time to time for clients who agree, where we are fully invested but wish to invest in additional attractive opportunities and/or further diversify. Margin involves borrowing funds against the assets of the account, a strategy which is often compelling from a tax point of view, since margin interest is tax deductible against earned or ordinary income and the potential capital gains are taxed at more favourable rates than dividend and interest income. Leverage increases both the possibilities for profit and the risk of loss for the account.
Q: How do you manage risk?
A: We have different layers of risk management, including:
– look for margin of safety in every holding, i.e., downside analysis
– seek financial, operational, management quality
– stock weight reflects risk/reward potential
– TRAC™: suggests entry and exit points
– TEC™: continuous analysis of economic activity
– inflation and interest rate expectations, currencies
– capital market cycles and sentiment, cyclical and secular trends, industries and commodities
– TRIM™: indicator for market stress points that may forewarn of broad market breakdown
– TRAC™: indicator for sentiment shift in markets, sectors and commodities—suggests entry/exit points
– seasoned portfolio managers and experienced team of research analysts
– portfolio guidelines
– diversity of ideas
– client policy permitting: long/short strategies; currency hedging; option strategies