Andrew McCreath forges ahead with successful asset management venture

Date: Wednesday, August 14, 2013
Author: Barry Critchley, Financial Post

Andrew McCreath has been a fixture on Bay Street for more than 20 years. He has been an analyst with Gordon Capital, a portfolio manager with two mutual fund managers (Synergy and Sentry Select) and with his own firm, Waterfall Investments. Funds he managed have won Lipper and Morningstar awards.

Along with former colleagues Fatima Hirani, Ashley Kennedy and Andrew Parks, McCreath has a relatively new venture, Forge First Asset Management. It manages two funds — a Market Neutral LP and a Long Short LP — both of which just celebrated their first year in business. Accordingly, the two funds, currently open only to accredited investors and both of which are still fairly small in terms of assets, have a one-year track record: Aug. 1, 2012 to July 31, 2013.

That 12-month record is fairly impressive: the long short fund has returned, net of fees, 38.91%, or almost four times the S&P/TSX composite index over the same period, while the market neutral fund has gained 33.18% net of fees. Both funds have a 20% performance fee and what’s known as a lifetime high water mark.

“We are pleased with the results,” said McCreath, the chief investment officer, while acknowledging “it’s a different economic and investing world today. Investors have had some bad experiences and their tolerance is lower. They expect greater transparency to enable them to be more comfortable,” he said, adding the firm’s plan was to develop “a track record for a period of time and then start raising money.”

McCreath, who is musing about opening the two funds to retail investors next year, is particularly pleased with the way performance has been achieved: both have very low betas, (8% for the market neutral fund), reasonably high alphas (more than 30% for both funds) and high Sharpe ratios (a measure of return relative to the risk taken) of around four times.

As for the distribution of the returns, McCreath said eight stocks sold short and two long stocks have generated 40% of the gross returns. “It’s a pretty diversified generation of returns. They are not generated from fast-money trading,” said McCreath, adding that the two portfolios are similar, though the long-short fund typically doesn’t contain commodity-related securities.

About 70% of each funds’ 200 securities (fewer in the long-short fund) are Canadian, while the rest are U.S. issuers. Indeed the bulk of the return has been made in Canada. While the TSX has generated little return this year, “you can short material stocks, you can short energy trusts which haven’t had sustainable distributions and you can short companies that are over-leveraged,” said McCreath, adding both funds don’t invest in private companies. While McCreath says the two funds  could “get out of more than 80% of our book in one day,” Forge First is not an active trader.

Which stocks to buy or short flows from assessing the big-picture global themes  including the economic outlook, particularly for the U.S. and for emerging economies.  Once a view about a theme is formed (say slowing demand for companies that sell raw materials to China) McCreath said “you can short the whole sector,” from companies that produce iron ore, coal and copper. “There are a lot of names but you don’t take big weights. It’s one of the tools we use to manage risk,” he said, adding that the “view is constantly re-assessed as to whether we are appropriately positioned.”

For non-sector calls, stocks are selected after what McCreath refers to as extensive “data mining.”