Guide to Reading Your Statements
Your Vertex One account statement is a valuable resource that provides you with the information that you need to stay up-to-date on your Vertex One investments. We’ve created this guide to help you understand the quarterly and annual statements that you receive from us. Download the guide (PDF).
Tax Season Checklist
With April showers comes May flowers … but first comes tax season.The deadline for Canadians to file individual tax returns is April 30th. To help with your tax preparation, we have put together a brief review of the tax documents that you should receive from us, depending on the type of account(s) you hold.
Sometimes referred to as ‘Cash’ accounts, these are simply any investment account other than a TFSA, RRSP, RRIF, LIF.
T3 (statement of trust income and allocations) These slips show any interest, dividend, or capital gain income earned, and are issued for any fund that has had a distribution in the previous year.
T5008 (statement of security transactions) This slip reports the amount paid or credited to you for fund units you disposed of (redeemed or switched between funds) during the year.
Contribution Receipt You should get a receipt for contributions made to your RRSP in 2018, and a secondary one if you contributed in the first 60 days of this year. These receipts indicate the total contribution amount made within the specified period, and allow you to claim the appropriate deduction to your taxable income.
T4RSP You will receive a T4RSP slip if you made a withdrawal from your RRSP in 2018. This includes the total withdrawal amount as well as any withholding tax that was remitted to CRA on your behalf.
T4RIF If you hold a RRIF with Vertex One, you will receive a T4RIF slip. This slip confirms the amounts that have been withdrawn, including your minimum payment, any additional redemptions, as well as any withholding tax that we remitted to CRA on your behalf.
You will not receive any tax slip for your Vertex One TFSA (just one more great feature of these accounts!). However, you should always be aware of the contribution limits for TFSAs.
While Vertex One Asset Management issues various tax slips and supporting documents, it is your responsibility to ensure that all income is reported on your Income Tax Return—whether or not it is reported on a tax slip.
Active vs. Passive Management
Vertex One Asset Management is an active management firm.
Active investment management involves the use of a management team to dynamically manage a fund’s portfolio. Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell. They are not constrained to hold prescribed securities or portfolio weights in sectors. The objective of an active manager is to outperform the market (benchmark).
Passive investment management or “indexing” is the opposite of active management. The manager’s objective is to replicate a fund’s portfolio after the market. The manager will hold similar securities and sector weights to a chosen stock market index. Passive management does not involve stock-picking as it is believed a manager cannot outperform the market.
Absolute vs Relative Returns
Investment firms have different mandates for how client money should be managed. The two main investment mandates are absolute returns and relative returns.
Relative return firms manage their fund’s portfolios to match or closely resemble a prescribed benchmark or stock market. The idea is that they are either a passive management shop and don’t believe they can outperform the market or they are concerned about underperforming the market.
Absolute return firms, like Vertex One Asset Management, manage their fund’s portfolios with the goal of providing positive returns in any calendar year, independent of the market cycle. These firms are more concerned with growing client assets through capital preservation than they are with underperforming the stock market. Down periods still occur but over a 1-3 year cycle they aim to outperform the stock market and relative return funds.
There are many methods to diversifying a portfolio. The most common involves the use of holding multiple asset classes that have low correlation to each other. Examples of asset classes include: common equities, fixed-income, currency and cash equivalents. However, there is an additional investment type that many argue is a separate asset class – Alternative Investments. At Vertex One, we employ the use of every type of asset class (except cash) to fully diversify our clients investments.
Diversification by sector is another common practice. This style involves diversifying your portfolio into many different business sectors. For example: Financials, Utilities, Materials, Technology, Consumer Discretionary. We also utilize sector diversification in our funds, conscious not to have “all our eggs in one basket”, so to speak.
Geographic diversification involves owning companies domiciled in multiple geographic regions. For example: Canada, United States, Europe, Asia, Emerging Markets etc. We are not as concerned with borders and invest wherever we see opportunity.
Strategy is a less common diversification method but perhaps more effective. At Vertex One, we utilize many different strategies to achieve results. Examples of strategy classes include: Longs, shorts, arbitrage (mergers and acquisitions, convertible, capital structure), private securities. These are effective tools for diversifying a portfolio as they often have low correlation and can provide varying levels of risk for the return.
We look at the entire capital structure of a company to determine where the best investment lies. Be it a single security or a combination of securities, we evaluate all opportunities for the best risk/reward return.
“Plant, Grow, Harvest” is our value investing process of building a position following extreme devaluation and patiently waiting for its return to reasonable levels, before harvesting a profit.
Fairfax Financial example: Position was built around $100 following a significant depreciation in share price. We then patiently waited for the stock to grow to a reasonable valuation. As a result, we harvested a 400% return.
- Companies trading at 1/2 of market value
- Example: market trades at 2x book value whereas company trades at ≤ book value
- Durable long-term prospects for growth
- Quality companies out of favour with investors (not poor companies in derelict industries)
- Out of favour because of a previous event within the industry, sector or company
- Low Debt
- Annuity Streams
- Situations where a catalyst is not currently evident but could materialize
- Before hyper-valuation occurs
- We will not hold an overvalued stock solely because it has momentum – that is where real losses occur
- “the fall from the peak is much quicker than the climb”
- At media saturation point
- When theme becomes a prevalent investment pitch it is time to move on. Evidenced by broker, media and cultural coverage.
- Investment themes naturally cycle
Catalyst Growth Investing
Long investments involve the purchase of securities (primarily equities) for the purpose of capital appreciation. Investments are selected based upon favourable valuation metrics and/or prospects for earnings growth and/or dividend increases.
Short selling (hedging)
The sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is motivated by the belief that a security’s price will decline, enabling it to be bought back at a lower price to make a profit. Short selling may be prompted by speculation, or by the desire to hedge the downside risk of a long position in the same security or a related one. This strategy is used to offset risk. A portfolio manager may also sell FX forward contracts to hedge (reduce) foreign currency exposure, related to foreign positions held in the portfolio.
This strategy involves capturing a profit from the discount between the market price and the “deal” price for a target company in an announced, legally-binding merger situation. When part of the merger consideration includes shares of the acquiring company, the fund hedges by selling short these shares while simultaneously buying the target company shares. In a deal for cash consideration only there is no need to hedge with the acquirer’s stock. This is a market-neutral or absolute return strategy; meaning it provides profit regardless of the direction of the general market.
High-yield is a strategy that can provide the portfolio predictable income in addition to capital gains. High yield securities may include corporate grade bonds, convertible corporate bonds, preferred equity or convertible preferred equity. It is called high yield because interest payments are set at a premium to high grade debt due to the increased risk associated with the issuing company’s credit status. Careful credit analysis can mitigate these risks and reveal good risk-adjusted return opportunities.
Hybrid bond or hybrid preferred equity having floating rate coupons. This means that their interest payments change in accordance to an underlying benchmark. Usually the coupon rate is related to a standard lending rate such as LIBOR (London InterBank Offered Rate). Hybrids can be an effective investment tool in a changing interest rate environment.
Private securities are companies that do not trade on a public exchange. Investments may be made in the form of equity or debt in a private company. These investments can provide opportunity for early stage investment or favourable lending.
Capital Structure Arbitrage
Capital Structure Arbitrage seeks to capture relative value within the capital structure of a single issuer. For example, a long position in an issuer’s senior debt coupled with a short position in either equity or subordinated debt.
Convertible Arbitrage captures a mispricing of a convertible bond by synthetically recreating the payoff of the bond using the underlying equity. A typical position would be long a convertible bond against a short position in the underlying stock. The short position is dynamically rebalanced such that little or no directional exposure is taken. The resultant P&L will be primarily driven by the realized volatility of the underlying stock.
Warrant Arbitrage captures a mispricing of a warrant by synthetically recreating the payoff of the warrant using the underlying equity. A typical position would be long a warrant against a short position in the underlying stock. The short position is dynamically rebalanced such that little or no directional exposure is taken. The resultant P&L will be primarily driven by the realized volatility of the underlying stock.
Special Situations is an umbrella term for opportunities that may catalyze a security independent of market moves or the performance of the underlying business. Examples include M&A activity (buying or selling), recapitalizations, spin-offs, liquidations, bankruptcy, index changes, and litigation proceeds.
Spin-outs occur when a diversified business creates a new standalone company from a portion of its business activities. Spin-outs can unlock significant shareholder value for both companies by separating the business lines.
This involves identifying companies that are in distress or on the path to bankruptcy and shorting their common shares. Profit is gained when the companies’ shares decrease in value. In the Vertex Fund we limit this strategy to 15% of the fund’s Net Asset Value.
Covered Call Writing
An option strategy we commonly employ to generate income and reduce volatility in the portfolio. Covered call writing involves selling call options to earn a premium while owning the underlying stock. When utilizing this strategy with dividend paying equity it can provide a lucrative income stream, due to the two sources of yield.
“We begin everyday trying to reduce risk in our portfolios but not necessarily volatility.”
The concept of risk has a different meaning to every investor. It is a personal feeling towards the desire to make a return on your investment and the fear of the potential for losing some of your invested capital. There is no industry accepted approach for how to quantify or qualify risk but volatility is commonly used. The Investment Funds Institute of Canada (IFIC) guideline for qualifying risk using volatility is:
CSA Fund Facts Investment Risk Scale
Investment policies suffer from a tendency to equate volatility with risk and an indifference to whether assets are cheap or expensive.
Volatility, commonly quantified by the standard deviation of a portfolio, is a problematic concept. We begin everyday trying to reduce risk in our portfolio but not necessarily volatility. Volatility in the short term is hard on stomachs and nerves, but in the long term will deliver better investment returns.
Additionally, standard deviation does not discriminate against general (upside) volatility in returns (i.e. +5% to +10%). See Sortino Ratio for a measure that isolates downside deviation.
Vertex One does not charge commissions, transaction fees or account administration fees on any class of shares.* Owning more funds does not equal more fees. All fees related to the operation of a mutual fund are calculated as a percentage of the net assets of a fund. Or better put, fees are a percentage of your overall assets invested.
The Management Expense Ratio (MER) of a fund is a percent value of the total fees expensed by a fund in a calendar year, as a ratio of its total net assets per share class. MER includes fixed and variable fees.
May include (but not limited to): management, audit, recordkeeping, accounting, HST, custodial, Trustee, IRC, Fundata
May include (but not limited to): performance fees, trading expense ratio, security borrowing, legal
How Management and Performance fees work
Performance fees are either subject to high water marks, relative high water marks, or hurdle rates. The following provide examples of how each feature works.
High Water Mark (HWM) Example
This displays a monthly-valued fund which collects quarterly performance fees, subject to a high water mark (Vertex Fund and Vertex Arbitrage Fund). A performance fee will accrue at month-end for a percentage of the rate or return that exceeds the HWM. At quarter-end, the fund pays a performance fee of the amount that accrued throughout the quarter. Each time the fund pays a performance fee a new HWM is set. For any valuation period below the HWM, no performance fee is collected. In the above example, a performance fee is collected at the end of Q1 and Q3 but not at the end of Q2 or Q4.
Relative High Water Mark (Daily Funds)
Fund Daily Return
Benchmark Daily Return
Daily Relative Performance
Relative Performance Since HWM
Performance Fee %
The above table shows an example of how performance fees are collected for our Prospectus (daily-valued) funds. Performance fees are accrued daily based upon the relative performance to its prescribed benchmark. Any day a performance fee is collected, a new HWM is set. Deficiencies to the HWM accumulate for each day the fund underperforms the benchmark. Applicable performance fee accruals are paid at quarter-end.
From our Simplified Prospectus: “If at any time the performance of a Fund is less than its benchmark, a high water mark is set. Performance fees will not be accrued until the performance of such Fund, relative to its benchmark, has exceeded the amount of the deficiency from the high water mark. Performance fees will be calculated and accrued (and become payable) daily, and such accrued fees will be paid by the Fund quarterly such that, to the extent possible, the Unit price each day will reflect any performance fees payable at the end of such day.”
Hurdle Rate refers to the minimum rate of return required in a calendar year before a performance fee is collected. The Vertex Managed Value Portfolio has a hurdle rate of 5%. This means, a performance fee cannot accrue unless the fund’s year-to-date return exceeds 5%.
*Arrangements with external advisors for their investment services may include additional fees.
There are no account administration or transaction fees charged on Vertex accounts.
Tax Free Savings Account – A TFSA is a terrific investment vehicle for all investors. It is exactly what the names suggest, a fully tax-free investment vehicle. In contrast to a Registered Savings Plan (RSP) which is a tax-deferral vehicle, TFSA provide un-penalized liquidity and a shelter against any tax consequence.
Registered Savings Plan – An RSP is an effective investment vehicle for deferring tax consequences until a later date when an investor’s personal income has reduced (usually by retirement). No taxes are paid until the time of a withdrawal of funds, meaning it is sheltered from distributions. RSP accounts also offer tax credits in the year that investments are made. Other benefits include the Home Buyer’s Plan, Lifelong Learning Plan and spousal plans.
Both the TFSA and RSP are individual accounts meaning that each spouse can open an account. There are annual limitations to the amount you can contribute to each account type.
Non-Registered Accounts – non-registered or cash accounts offer investors the most flexibility. There are no contribution or withdrawal restrictions. Withdrawals are subject to standard capital gains and/or income tax rules. Similarly, any fund distributions are taxable in the year of the distribution. This account type is not restricted to individuals and can be used for Corporate or Joint accounts.
We offer two types of funds: Simplified Prospectus and Offering Memorandum.
Simplified Prospectus – These are daily-valued, mutual funds sold via Simplified Prospectus. They are open to any investor to purchase, should they meet the appropriate investment minimum. No paperwork is required for purchase. Prospectus funds are subject to more investment restrictions and tend to be long-only.
Offering Memorandum (OM) – These are monthly-valued, alternative funds sold via Offering Memorandum. Depending on regulatory requirements in an investor’s province they are open to accredited investors or via a risk acknowledgement form. Subscription agreements are required for each purchase (unless under a Vertex One Investment Management Agreement). OM funds have less investment restrictions and allow managers to engage in alternative strategies such as shorting. We limit the use of leverage in all of our OM funds.