Jerome Hass, Portfolio Manager, Lightwater Partners Ltd.

FOCUS: Canadian Mid-Caps and Long-Short Strategies



Our investment style is focused on pair trades. The main reason we use pair trades is to minimize Market Risk and Industry Risk. Hence, we spend our time researching the companies we invest in rather than trying to predict the outlook for the stock market.

There was an interesting article in the Globe & Mail on Monday which talked about global hedge fund managers shorting Canadian banks. Canadian banks are trading at a forward price/earnings ratio (PER) which is in line with long-term averages. The author was perplexed at the “extraordinarily large short positions on all domestic banks.” In the case of TD Bank, the short positions were 2.3x higher than its 10 year average. The problem with this analysis is that it looks at only half of the picture. In pair trading, both stocks can go up or both can go down; profit or loss is determined by how they move relative to each other. That is, if the long position falls less than the short position or the long rises by more than the short, one will make a profit. For a U.S. hedge fund, a logical long position against a short position in Canadian banks would be a large U.S. bank. The four largest U.S. banks trade at a 9.7x forward PER and a Price to Book Ratio (PBR) of 0.9x. Canadian banks trade at a forward PER of 11.4x and a PBR of 1.7x. These ratios imply that Canadian banks are expensive relative to U.S. banks. Canadian banks are up about 10 per cent year to date versus a 9 per cent drop in U.S. bank shares. Thus, in the context of pair trading, it is easier to understand the significant short position that global hedge funds hold against Canadian banks.

Top Picks:

Callidus Capital (CBL.TO)

Callidus is Canada’s only listed asset-backed lender. It lends to distressed companies that most people or banks would not lend to, as Canadians tend to be risk-averse by nature. Hence, it is easy to paint a bearish case for Callidus. Where others see danger, we sometimes see opportunity. We invest based on risk versus return, not sentiment. Our down-side is protected by (i) a Substantial Issuer Bid at $14, (ii) a share buy-back once the SIB expires, (iii) a 6.8 per cent dividend yield (recently bumped by 50 per cent), (iv) a fair valuation range of $18-22 as determined by independent assessor, National Bank Financial and (v) a potential of privatization before year end if the share price does not improve to reflect the company’s operational performance. [We added to our CBL position on 21 April at $13.66]

SHORT * Canadian Western Bank (CWB.TO)

The Great Recession of 2008-09 officially started in Q2 of 2008.  At that time, CWB had Gross Impairments of 0.50 per cent of its loan book. It took 8 more quarters for loan impairments to peak - at a level 3x higher than when the recession started. It took 17 more quarters (i.e. 4.25 years) for loan impairments to return to pre-recession levels. The 2015 Recession started in Q2 of 2015.  Arguably, the 2015 downturn has hit western Canada harder and for longer than in 2008. Our view is that the market is not fully recognizing the long impairment and provision cycle that lies ahead for CWB.

[We added to our CWB SHORT position at $23.38 on 31 Dec.]

* SHORT * AGF Management (AGFb.TO)

CRM2 and ETFs. Two acronyms that underlie our short thesis. CRM2 (Client Relationship Model, phase 2) is a new regulatory initiative that takes effect on July 15th. It will force brokers and fund companies to disclose all embedded fees to their clients in their statements. This should put downward pressure on fund fees across the mutual fund industry. Even prior to this measure, AGF has had to reduce its fees for competitive purposes. Exchange Traded Funds (ETFs) are increasingly taking market share from mutual funds due to their much lower fee structure. This trend will accelerate under CRM2.  AGF has had net redemptions from its funds for years. We do not see this trend halting any time soon. 

[We added to our AGF SHORT position at $5.16 on June 9th.]

Disclosure Personal Family Fund/Portfolio
CWB (Short) 
AGFb (Short) 

Past Picks:  May 29, 2015

Currency Exchange International (CXI.TO) 

  • Then: $35.32
  • Now: $25.96
  • Return: -25.93%
  • TR: -25.93%

Enercare (ECI.TO)

  • Then: $14.50
  • Now: $16.40
  • Return: +13.10%
  • TR: +19.65%

Clearwater Seafoods (CLR.TO)

  • Then: $13.25
  • Now: $14.16
  • Return: +6.87%
  • TR: +8.45%

Total Return Average: +0.72%


Disclosure Personal Family Fund/Portfolio

Fund Profile:

Name: Lightwater Long Short Fund

Performance as of: 31 May 2016

1 month: Fund 2.82%, Index* 0.82%

1 year: Fund 1.72%, Index*-6.32%

3 year: Fund 19.96%, Index*3.60%

* Index: S&P / TSX Composite Index.

** Returns provided are net of all fees and expenses.  3 year figures are annualized returns

Name: The Nimble Fund

Performance as of: 31 May 2016

1 month: Fund 0.81% Index* 0.82%

2 year: Fund 22.13%, Index*-1.86%

3 year: Fund 23.61%, Index*3.60%

* Index: S&P / TSX Composite Index.

** Returns provided are net of all fees and expenses.  2 year and 3 year figures are annualized returns


We sold Grenville Royalty Trust in May 2015 at $0.54.  It was a top pick on 15 September 2015 at $0.59.

We covered our SHORT position in Valeant Pharmaceutical in 15 March 2016 at $50.51.  It was a top pick on BNN as a SHORT on 8 July 2015 at $289.97.

We covered our SHORT position in Amaya Gaming in February 2016 at $19.33.  It was a top pick on BNN as a SHORT on 15 September 2015 at $27.04.


Twitter: @LightwaterPart