Live From the Desk 5

Enhanced Income Fund Update

These days, the latest thing with kids is gummy vitamins (officially called nutraceuticals). For anyone who has had trouble getting kids to eat vitamins, they are (dare I say it) a lifesaver!

One of the largest nutraceutical manufacturers in North America is Harmony Foods (conducting business under the brand name Santa Cruz Nutritionals). Harmony came out in April with a 10% coupon, 5-year, $115m high yield issue. With the troubles the market has had this spring and early summer, Harmony has been a ray of sunshine amidst the grey, trading above parity since issue.

If you have young children, chances are you may recognize some of Harmony’s gummy bear vitamins and if you’ve done any sort of racing, you may be familiar with another one of their products the Clif Shot Bloks energy chews.

This is a perfect example of a smaller issue that we tend to look for in our income fund. The issue is too small for a lot of other income funds to take part in and what we find exciting is that we have a recognized industry leader in a growing “Blue Ocean” business segment. It also has a nice risk/reward tradeoff (valued at just over 4x twelve month EBITDA) in comparison to other equivalent yielding instruments.

For those not familiar with the concept, from Wikipedia:

Blue Ocean Strategy is a business strategy book first published in 2005 and written by W. Chan Kim and Renée Mauborgne of The Blue Ocean Strategy Institute at INSEAD. The book illustrates what the authors believe is the high growth and profits an organization can generate by creating new demand in an uncontested market space, or a “Blue Ocean”, than by competing head-to-head with other suppliers for known customers in an existing industry.”

Think Lululemon or Southwest Airlines for examples of “Blue Ocean” business.

We hope you are having a great summer and if you want an outside of the box financial book to read on the beach, “Blue Ocean Strategy” is a good one.

until next time. . .

@The Vertex Team

For information on this update or the funds we offer, please contact your local sales representative:

Noel Dattrino
(Western Canada)
604.408.5660

Michael Lindblad
(Central and Eastern Ontario)
416.200.4457

James Wilson
(Central and Western Ontario, Maritime Canada)
519.902.7780