We Apply A Private Equity Mindset To The Public Markets

Opportunities Fund LP


The Opportunities Fund applies a private equity
mindset to public company investing

We invest in a concentrated portfolio of carefully-selected businesses, run by management teams we know and trust, and usually with the intent to hold for several years. Occasionally, in the public markets, there are opportunities to buy fractional ownership in businesses at prices below what a rational seller would part with for the entire company. The Fund targets a 10-15% IRR over time and seeks to preserve capital by avoiding companies that trade at expensive valuations, have significant leverage and/or operate in industries subject to rapid change.

Investment Strategy


We maintain a disciplined approach by classifying
each investment according to our “Playbook”

Investors are often asked to describe their investment strategy. To our knowledge, it has never been answered with the explanation that the investor likes to overpay for shrinking, low-quality businesses run by subpar management teams (although this is quite often what happens). Instead of conventional classification, we describe our investment strategy using the analogy of a sport’s Playbook. A team with only one play can often be stopped, but a championship team will have perfected a few plays to ensure success regardless of game conditions and the opposition’s tactics. In our Opportunities Fund, we classify each investment according to four plays:

Risk Management


Risk is the chance
of permanently losing money

Flexible Fixed Income Fund LP


Our Goal

The goal of the partnership is to earn 5-8% annualized net returns, over a reasonable timeframe, while controlling volatility and minimizing the risk of permanent loss. We define a reasonable timeframe as five years, which translates into a cumulative return in the range of 30-40%. We think our goal of achieving stable, 5-8% net returns compares favorably to our two principal benchmarks – the iShares Canadian Investment Grade Corporate Bond Index ETF and the iShares US High Yield Bond Index (C$-hedged) ETF. These two benchmarks reflect well-known and accessible fixed income alternatives which can be regarded as our Limited Partners’ fixed income opportunity cost.

Fund Performance


PERFORMANCE SUMMARY
FLEXIBLE FIXED INCOME FUND LP*
ISHARES US HIGH YIELD BOND ETF**
ISHARES CANADA CORP BOND ETF
Annualized Returns (SI)
8.1%
7.4%
3.8%
Year-to-date
4.3%
10.1%
7.8%
October 2019
0.4%
0.3%
-0.1%
Max Drawdown
0.7%
4.7%
2.4%
Duration
2.7
2.9
6.6
Volatility
2.3%
4.7%
3.1%
Sharpe Ratio
2.8
1.2
0.7

*Returns reflect Class P – Master Series. **Hedged to CAD.***Sharpe Ratio is a hypothetical measure of excess return. The Canada 3 month treasury bill rate as of October 31, 2019 as the risk-free rate of return in calculating Sharpe Ratio

MONTHLY NET RETURNS (%)*

YEAR
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
YTD
2019
1.2
0.4
1.4
0.9
0.4
-0.7
0.4
-0.4
0.3
0.4
4.3
2018
1.2
0.5
0.1
0.6
0.6
0.6
0.2
-0.3
0.4
0.3
0.2
0.2
4.7
2017
1.4
0.3
0.7
1.0
0.7
0.5
0.3
-0.2
0.4
0.7
0.7
0.4
7.0
2016
1.4
3.0
1.1
1.4
0.9
2.3
1.1
0.6
1.1
-0.2
1.0
14.6

This letter does not constitute an offer to sell or the solicitation of an offer to buy any interest in the Ewing Morris Flexible Fixed Income Fund LP. Such an offer to sell or solicitation of an offer to buy interests may only be made by way of a definitive subscription agreement and is only available to investors who meet legal requirements for investor suitability and sophistication. The Fund has a flexible investment mandate. Therefore, the Fund’s composition is materially different to major indices. We have listed the iShares U.S. High Yield Bond Index ETF and iShares Canada Corporate Bond Index ETF because they are representative of widely known and followed fixed income benchmarks. These benchmark indices are provided for information only and comparisons to benchmarks and indices have limitations. Investing in fixed income securities is the primary strategy for the Fund, however the Fund does not invest in all, or necessarily any, of the securities that compose the referenced benchmark indices, and the Fund’s portfolio may contain, among other things, options, short positions and other securities, concentrated levels of securities and may employ leverage not found in these indices. As a result, no market indices are directly comparable to the results of the Fund. While information prepared in this report is believed to be accurate, Ewing Morris & Co. Investment Partners Ltd. makes no warranty as to the completeness or accuracy nor can it accept responsibility for errors in the report. This report is not intended for public use or distribution. Past performance does not guarantee future results. The Sharpe Ratio is a form of hypothetical performance data. Unlike an actual performance record, simulated results do not represent actual performance and are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk. There are frequently differences between simulated performance results and the actual results subsequently achieved by the fund.

Philosophy and Fund Management


Thoughts On Risk


A critical part of our goal is to minimize the risk of permanent loss (what we consider to be true investment risk) and control volatility. We would posit that “permanent loss” also be considered “permanent loss of purchasing power,” a concept that takes into account the impact of inflation on capital. At current rates of inflation, one dollar today needs to grow by about 2% on an after-tax basis to avoid loss of purchasing power. From this perspective, it can be understood that long term allocations to cash effectively ensures permanent loss. Even at today’s low rates of inflation, a 5-year holding period would result in an approximate 10% impairment on cash relative to the future cost of living. Our view is that higher yielding fixed income investments are one of the few conservative means of minimizing loss of purchasing power while maintaining a liquid investment profile.

Dark Horse Fund


THE DARK HORSE IS A
CONCENTRATED, LONG / SHORT STRATEGY
WITH TYPICALLY LOW NET EXPOSURE.

The Dark Horse LP is an investment limited partnership intended for high net worth, institutional and accredited investors. “Dark Horse” is an old handicapping term referring to a horse that is overlooked, unappreciated and mistakenly cast off as another long shot. The true Dark Horse sports long odds while possessing many of the skills and attributes of the favorite. It is the best value in the race. It is the type of wager that those who “know their stuff” and do their research seek. The Dark Horse is the underdog that should not be such and is exactly the sort of investment that we seek for our partners.

Investment Strategy


Risk Management


We aim to avoid liquidity, concentration and market risk by adhering to strict risk controls and discovering esoteric company specific opportunities to exploit with long & short positions.

Partners Fund


The Partners Fund gives our Limited Partners access to our full investment team and their expertise, across our strategies.

The Partners Fund allocates dynamically to each of our strategies with an average weighting of 60% Ewing Morris Opportunities Fund LP, 10% Broadview Dark Horse LP and 30% Ewing Morris Flexible Fixed Income Fund LP, over time. The Fund may invest in other funds or underlying securities from time to time, that complement these strategies. We may adjust the allocation to each of the funds as market conditions change and opportunities arise.

Investment Strategy


We describe our investment strategy using the analogy of a sport’s playbook. A team with only one play can often be stopped but a championship team will have perfected multiple plays so that they can score and defend regardless of the opposition’s strategy. In our Partners Fund, we classify each investment according to three plays:

Risk Management


We view risk as the chance of permanent capital loss and believe that volatility represents a source of opportunity. We invest when security prices are trading at a significant discount to our estimate of true value. This is designed to provide a margin of safety to protect capital against unexpected events such as economic crises, natural disasters, political events and new technologies. Our goal is to protect and grow our clients’ purchasing power over time.