Seeking idiosyncratic opportunities in the secondary bond market

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If the story of David and Goliath were about modern day investing, Fulcra Asset Management (Fulcra) president Matt Shandro thinks the big guy would be a large investment management firm. It may be operated by talented portfolio managers, but may still be hamstrung by scale and hampered by the constraints of benchmarks and a top-down view of the investment landscape.

Fulcra, on the other hand, is an independent management firm that thrives on flexibility to nimbly seek out idiosyncratic opportunities and market dislocations in search of returns for its clients.

Prior to Fulcra, Shandro served as portfolio manager for both CI Investments Inc. and Great Pacific Capital Corp. He launched Vancouver-based Fulcra in 2009.

“I enjoyed my previous roles,” he says. “But I realized that I enjoy the business of investing more than being in the investment business. Fulcra allows me to focus on what I love doing most.”

Shandro’s investing philosophy is partly informed by the drive and discipline he brings to running, a passion since university. His father, a serial entrepreneur, helped him to develop an analytical eye for business fundamentals.

“We had conversations around the dinner table about ventures that worked out and those that didn’t,” he says. “Those conversations helped develop a healthy appreciation for understanding business risk.”

As the plural for fulcrum, Fulcra’s mandate is reflected in its name. While investing in common stock often involves assessing the risk and reward inherent in a company on a single fulcrum, Fulcra looks at multiple opportunities for risk and reward within the debt portion of a company’s capital structure. Shandro’s team of five assesses each additional layer of corporate debt risk, from first and second lien, and junior notes to additional complexities to seek value in an array of return characteristics and opportunities.

“Fulcra arbitrages the robotic, institutionalized approach to investing in credit,” Shandro says. “We look for value in non-investment grade bonds or fallen angels where pure investment grade fund managers are restricted from going. We’ve even found interesting opportunities in defaulted bonds. Working in the secondary market space, we’re also not bidding against bigger players for supply at new issue.”

Using a bottom-up approach, Fulcra typically manages a fund where the top 20 companies represent roughly 60 to 70 per cent of the portfolio. That concentrated approach allows Fulcra to punch above its weight on a company-by-company basis and act as a “friendly creditor” to negotiate appropriate compensation as debt is refinanced.

While the lines of communications between passively managed funds, such as bond ETFs, and their investors is often marked by generalizations, Shandro says he feels a responsibility to be more transparent.

“From my perspective, it’s really important to see the whites of the eyes of advisors and direct investors,” he says. “We want to tear down communication barriers and make sure that our investors understand our strategy, how we’re applying it and that we’re delivering.”

Currently, Fulcra is focused on short-duration, high-quality bonds that are paying higher yields. The team is also looking at opportunities stemming from M&A activity driven by a softening economy and higher interest rates.

“When two balance sheets meld, covenants can be triggered and these events provide great opportunities for us in short-duration investments that are very attractive,” Shandro says.

Lysander-Fulcra Corporate Securities Fund aims to provide income and capital growth by investing in fixed income, floating rate, convertible, preferred equity, and common equity securities of corporations — primarily small- and mid-cap — anywhere in the world. This fund is available to retail investors as a prospectus mutual fund.  Lysander Funds Limited is the investment fund manager of this fund.

Making investment decisions that go against the grain of the broader bond market can be exhilarating, Shandro says — but he also finds it humbling.

“As a mid-sized active management firm, the strategies we choose to pursue are more directly associated with the performance of those funds.” he says. “Our responsibility to our investors is to always reflect the courage of our convictions.”

For more information on Lysander Funds and Fulcra Asset Management, click here.

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