How the financial crisis re-shaped this fund manager’s strategy.
HOW THE FINANCIAL CRISIS RE-SHAPED THIS PORTFOLIO MANAGER’S STRATEGY
In 2008, Ryan Marr felt invincible.
At 21, as a co-op student from Wilfrid Laurier University, he was handling millions of dollars in investments for Gluskin Sheff and Associates, a Toronto-based firm that had close to $4 billion in assets at the time.
For months, he felt he could do no wrong. His stock picks — a mix of REITs, Canadian and U.S. banks and tech companies such as
Miranda Technologies
and Evertz Technologies
Ltd. — were all making significant gains. Investing was easy, he thought, and he could make a career of it.
When global markets were struck down by the financial crisis that year, Marr remembers standing in front of a computer screen that displayed the market’s real-time impact on the firm’s investments and seeing that they had lost more than $240 million in one day. That number only grew as the crisis deepened.
“I think I was so naive to the implications of losing that much money so quickly that I was more fascinated with the magnitude of the losses,” Marr, now 32, said from a conference room in his downtown Toronto office, which sits directly above a toy store.
“You could be the best stock picker in the world, but when markets fall, you’re going to lose money and there needs to be a portfolio management decision that helps protect against those losses,” he added.
Marr was still getting acquainted to Bay Street when he saw his first investments tumble in the most brutal market crash since the Great Depression. Now a seasoned investor, the experience appears to have moulded his market strategies.
Last year, Marr’s new firm, Waypoint Investment Partners, earned its clients a 6.2 per cent return in segregated accounts. By comparison, the S&P/TSX Composite Index lost close to 12 per cent. Most of those losses came in a brutal final quarter, but in that time, Waypoint’s defensive portfolios managed to remain around even.
The firm is now looking to raise $500 million for a new hedge fund — the AllWeather Portfolio — devoted to Marr’s strategy, which attempts to insulate investors from massive downturns like the one he watched in awe as a co-op student.
Marr’s approach is twopronged. He invests in highdividend yielding Canadianlisted stocks that are outside the resource sector and deploy conservative balance sheets. Mainstream investors likely wouldn’t recognize most of his picks, Marr admitted, because analysts don’t cover them. There are only 110 stocks that fit his profile. Of these, he chooses to only focus on between 20 and 25 companies, rotating two or three out from the larger pool each year.
Marr then uses the dividends from these investments to buy put options, usually ranging between two to six months on Canadianlisted securities both inside and outside his portfolio and on indexes such as the S&P/ TSX60. Marr also writes some calls, but most of his emphasis is on downside protection.
The specific purchase decision is mostly based on pricing, he said, but he deploys a variety of puts ranging from at-the-money options to those with a strike price ten per cent below the current price. If the puts expire, he re-evaluates.
Should the market undergo a correction like it did at the end of 2018, the returns are safe, he said, because losses in the portfolio’s equities are offset by the returns from the puts. The strategy appears to be more well-suited for a market that is at the end of its natural cycle because when stocks are rising in a raging bull market, Marr is still buying put options.
If another investor with a basic equities strategy makes 10 per cent on their portfolio during this time, Marr would only make seven due to about three per cent of the returns going back to buying put options. The conversations Marr has with investors aren’t always the easiest. Not many are ready to give up a chunk of their returns for downside protection — until they see their investments plummet, that is.
“If the market were going up 10 per cent, they find it hard to understand, but when the markets go down 10 per cent, they all understand,” he said.
All it took for Marr to understand the same logic was one of the greatest market collapses in history.
Marr got his first job out of high school at Calloway Real Estate Investment Trust, now known as Smart Centres Real Estate Investment Trust, through a family connection. Working to pay his way through university, Marr was a summer intern but they let him make calls to put up collateral to receive funding for new projects. “I couldn’t believe how easy it was,” he said.
Securing $300 million was as simple as getting Merrill Lynch on the phone and sending over a list of properties that he believed were enough to collect that amount. “Next thing I knew, I was getting $300 million. I literally knew nothing,” he said.
During his next stop at Gluskin Sheff, where he’d stay for more than 10 years, Marr’s specialty quickly became investing in options. Working in long-short hedge funds, Marr began looking for an approach that didn’t involve shorting stocks in a low-interest-rates environment that made it difficult to reinvest the cash proceeds at high rates of return.
Options looked appealing because no one at Gluskin Sheff had really waded into that pool yet — firms were content to allow TD and BMO to dominate that market.
But the prices for buying put options were steadily declining and the feasibility of using them to hedge a portfolio grew more and more interesting. What Marr later learned was that others had developed the same idea as a way to look for additional yield that traditional fixed income portfolios weren’t providing. A “one-way trade,” as he called it, resulted in pushing the price of volatility down and making its appeal stretch market-wide.
While he paired his new options expertise with his fondness for high-dividend yielding stocks and began implementing the strategy for his personal investments, he never put it into practice at Gluskin Sheff. The reason, he said, is because the small-cap names he invests in “don’t necessarily have the scale to move the needle for a $9-billion asset management firm.” He didn’t even pitch the idea.
Marr preferred to leave the firm instead and see if he could make the strategy work on his own.
Perhaps his harshest criticism of the investment sector is one that’s constantly heard in Canada’s medical field: There are too many walk-in clinics and not enough family physicians or specialty clinics. Moving away from Gluskin Sheff would be akin to working in his own specialty clinic.
It didn’t take long for him to be recruited at Waypoint, which was then a multifamily office being run by another former Gluskin Sheff alum, the firm’s former chief investment officer, Bill Webb. Webb left Gluskin Sheff two years before Marr did, but the two stayed in touch, and in multiple phone calls, Marr would plant the seeds in Webb’s mind about a new strategy that combined volatility with highdividend stocks.
Marr joined Waypoint in late 2017 as a partner and portfolio manager and immediately began to implement his strategies. The first results were positive, he said, and it didn’t take long for the firm to begin drawing attention from outside the partners’ family members. The creation of a fund was the next step in the evolution.
Most of Waypoint’s investors are in an older demographic and are saving for retirement. The strategy works for these people, he said, because it allows them to compound returns while avoiding tremendous losses. The investor he cannot help is one that has a significant amount of capital in play and is searching for growth in a “Hail Mary” investment, he said.
And yet Marr’s portfolio scored two victories last year that any investor would envy.
Pure Industrial REIT was Marr’s play on Amazon.com
Inc.’s good fortunes. While the tech giant would have been an albatross in Marr’s portfolio, he still wanted exposure to the online retail scene. Thinking that the logical play was to invest in the warehouse space that companies such as Amazon would require, Marr’s faith in Pure Industrial was rewarded when it was bought in January for $3.8 billion by Blackstone Group LP, a New York investment firm. His second big win came when Brookfield Infrastructure acquired Enercare, an Ontario-based company that rented water heaters to homeowners, in an October deal for $4.3 billion.
Each of those gains ended up contributing 2.5 per cent to his portfolio, he said.
As he prepares to begin investing in the All-Weather Portfolio this month, the newest stock atop Marr’s list is Sienna Senior Living Inc., a company that owns and operates nursing homes across Ontario. The stock lost 15 per cent between January and December 2018 but its 5.28 per cent dividend lessened the blow.
Based on its past performance, Marr also knows what he’s likely to get out of this investment considering the stock has not hovered above or below the $14-$19 range in four years. The future, however, appears to be brighter. The stock is his way of betting on waves of baby boomers retiring and heading into retirement homes and long-term care facilities. The sector currently offers about 430,000 beds, according to Marr, but as baby boomers start to move in, his projections have that number growing up to one million.
Unlike his early days, these are now the types of investments that define his portfolio. The bets on risky technology companies are gone and in their place are stocks that should never leave him wondering how $100 million disappeared.
There are no recognizable names or exciting growth opportunities in his portfolio — and that’s how he likes it.
“Some people look at it as a bit boring — but boring is good for me,” he said.
I WAS (SECURING) $300 MILLION. I LITERALLY KNEW NOTHING.