Patrimonica is an independent and integrated family office, an organization created to address all the financial management needs of wealthy individuals and their families in an integrated and cohesive manner.
The Patrimonica team consists of highly qualified, experienced professionals who take pride in providing bespoke solutions, focused on individual client needs and acting solely in the client’s best interest. Their comprehensive approach provides a holistic perspective and cohesion by integrating financial, tax and estate planning with the investment management functions, all within a risk management framework, ensuring a consistent focus on the achievement of long-term goals. The practice is owned entirely by its founders, ensuring absolute objectivity and a true alignment of interests.
Patrimonica Asset Management is distinguished by the rigor and completeness of its approach. Having defined its role clearly, our firm defines itself as an Outsourcing Investment Manager for high net worth families, foundations and endowments.
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Montreal, September 23, 2020 FROM LAGADO PROJECTORS TO MODERN-DAY SPAC SPONSORS In Jonathan Swift’s Gulliver’s Travels, Gulliver visits Lagado, the metropolis of the fictional island of Balnibarbi where he is given the privilege to examine the works of the Grand Academy’s scholars called Projectors. There, he is acquainted with Projectors that dedicate their life to futile studies such as the extraction sunrays from cucumbers, the transformation of ice into gunpowder or the softening of marbles to make pillows more comfortable. Swift was one of the most famous political satirists and pamphleteers of his time and this passage can be interpreted as a parody of the speculative excesses that were prevalent in the late 17th and early 18th century. It is worth noting that Gulliver’s Travels was published shortly after Swift’s generation had witnessed the collapse of two of the most notorious stock market bubbles in history. The first one took place in the mid-1690s. It involved a flurry of companies that had become public a few years earlier. Almost all of these companies were engaged in the manufacturing or distribution of diving apparatus and pumps, industries that had suddenly become ebullient after Sir William Phips and his associates, on a private expedition, were able to recover nearly 3,000 gold coins and three silver bars from the wreck of the Spanish armada ship Nuestra Señora de la Concepción. The view was that anyone with the right equipment could ‘strike gold’. Ultimately, most expeditions were ruinous and the companies supplying equipment for those ventures ended up worthless. The second one has a dedicated chapter in almost every financial market history book: the South Sea Bubble, which almost bankrupted England in 1720. This speculation mania centered of the South Sea Company which was founded in 1711 and enjoyed a British government monopoly to trade slaves with Spain controlled Central and South America. For many years, the South Sea Company’s stock languished, in spite of its guaranteed 6% interest, as the terms of the Utrecht Treaty with Spain in 1713 were less favorable than had been anticipated. In effect, an annual tax and a strict quota were imposed on slaves imported to the Americas. Confidence was restored in 1718 when King George I himself was nominated to the Board of Governors of the South Sea Company but it is only in 1720 that the South Sea Company’s stock took flight after the British Parliament accepted its offer to take over the National debt in exchange for an upfront loan. The company expected that the expansion of its trading activities would enable it to pay the government debt. Soon after the announcement, the South Sea Company stock went up eightfold. Business was lucrative for shylocks who were granting loans to Londoners who couldn’t get enough of the stock, and for swindlers and fraudsters who were promoting the stocks of other trading companies engaged in similar activities. One adventurer even set up a company whose prospectus stated “…an undertaking of great advantage, but nobody to know what it is.” Eventually, the stock market collapsed, dragging down the entire country with it, including notable members of the aristocracy. The collapse of the South Sea Company led Sir Isaac Newton – who reportedly lost a fortune in the debacle – to declare: “I can calculate the movement of the stars, but not the madness of men.” To be clear, we do not think that the global stock market as a whole is in bubble territory from a valuation standpoint. In fact, relatively speaking, developed markets government bonds, with maturities ranging between 5 and 20 years and with their yield to maturity standing at levels well below the expected inflation rate over the same maturity, appear to us in a far more precarious state. This is particularly true now that the Federal Reserve acknowledged that it will let inflation to overshoot above its long-term target of 2% before raising interest rates. Nonetheless, there are symptoms that bubbles may be forming in certain parts of the stock market, some of which would certainly draw Swift’s attention as a fertile source of inspiration were he alive today. For example, there are situations when dilutive stock offerings or stock split announcements are perceived positively on the grounds that more marginal buyers will now be able to participate. Other examples include the recent record high transaction volume on short-term single stock call options and, last but not least, the exuberance around Special Purpose Acquisition Companies, or “SPACs.” By way of background, a SPAC is a publicly listed company established with the sole purpose of acquiring another company, within a given time frame, typically 2 years. On its formation date, the SPAC does not own any assets and the money it raises from investors through its own initial public offering (IPO) is kept in a trust until the SPAC sponsor successfully consummate a merger with an operating company. Following the merger, the operating company becomes a publicly traded stock. Typically, SPAC sponsors receive a combination of shares in the SPAC (typically 20% of the outstanding shares), and warrants with an exercise price marginally above the SPAC’s IPO price, in exchange for small consideration. Importantly, the sponsor is compensated in shares once a merger is completed, not as a function of the company’s performance following the merger. In other words, SPACs sponsors tend to be incentivized more by the strict completion of a merger transaction itself than by the financial success of the operating company. If a SPAC fails to complete a merger within the time frame, it is contractually obligated to return capital to its shareholders. In 2020, more SPACs are raising IPOs than ever before. Separately, the amount of money raised by SPACs and the number of deals completed are also on record track. Our estimate suggests that SPACs are collectively sitting on more than 40 billion in cash raised from their respective IPOs. Once a tiny and obscure stock market niche attracting a number of unsavory characters, SPACs have gained notoriety as more sophisticated investors such as Bill Ackman are getting involved. Celebrities and political figures are also surfing the wave. For instance, Billy Beane, of Moneyball fame, is behind Red Ball Acquisition Corp. while Paul Ryan, the former Republican party house speaker, is the Chairman of Executive Network Partnering Corp. Some argue there are legitimate reasons that underpin the decision for an operating company to become public through a merger with a SPAC, as opposed to the more traditional IPO route. Rapidity of execution and certainty of proceeds probably rank amongst the most important reasons in comparison with the IPO process which is tedious and for which the value of the proceeds is usually not known until 24-48 hours prior to the IPO. From the vantage point of the SPAC shareholder, however, we do not see many good reasons, quite the contrary. First, as described above, there is an inherent misalignment between the interests of the SPAC promoter and the interests the shareholder. In effect, the SPAC promoter generally gets compensated simply for completing a transaction while the shareholder compensation is tied to the longer-term success of the company. Basically, unless the SPAC promoter manages to acquire a company that is undervalued by a greater percentage than the percentage of the company that he obtains for completing a transaction, SPAC shareholders tend to get a smaller fractional share of the post-merger entity than what they paid for. While some argue that IPOs are notoriously undervalued, given the lackluster performance of a large number of stocks post-IPO in recent years, we think the argument is debatable. Second, a SPAC shareholder does not have the same degree of regulatory scrutiny and transparency into the books and records of the operating company targeted by the SPAC as they would during the normal IPO vetting process. After all, investors that were contemplating the acquisition of WeWork shares were rewarded when the company’s IPO filing documents revealed its weak governance and aggressive accounting practices, ultimately forcing the company to shelve its IPO plans. Unfortunately, if history is a guide, in a world awash with liquidity and zero interest rates, while many SPAC sponsors are undoubtedly well intended, it is almost certain that many dramatically overvalued companies and potentially fraudulent ones will get the attention of SPACs. In many aspects, the SPAC promoters’ financial engineering approach to value creation may not be that different from the pseudo-science techniques employed by the Lagado Projectors which were dubious. Thankfully, signs of speculative excesses seem to transpire from relatively concentrated segments of the growth equity space. As such, the idea is not to eliminate growth stock exposure altogether. In fact, we find that certain growth stocks remain undervalued relative to value stocks. Therefore, from a portfolio construction standpoint, the key is to maintain a good balance between different types of stocks and between asset classes. Dimitri Douaire, M. Sc., CFA Co-Chief Investment Officer  Jonathan Swift, Gulliver’s Travels. Original title: Travels into Several Remote Nations of the World. In Four Parts. By Lemuel Gulliver, First a Surgeon, and then a Captain of Several Ships, Benjamin Molte, 1726.  Charles Mackay, Memoirs of Extraordinary Popular Delusions, Richard Bentley, London, 1841.  In July, Bill Ackman raised 4 billion for the IPO of Pershing Square Tontine Holdings Ltd., the largest SPAC IPO to date.  Billy Beane is the former General Manager of the Oakland Athletics professional baseball team from 1997 to 2015 whose attempt to assemble a competitive team is depicted in the movie Moneyball (2011, directed by Bennett Miller) based on Michael Lewis’s book Moneyball: The Art of Winning an Unfair Game (W.W. Norton & Company, 2003). Photo credit
Montreal, July 30, 2020 ENTERS PLUTUS, THE GREEK GOD OF WEALTH Johann Wolfgang von Goethe was not a particularly prolific writer. The genesis of his magnum opus took over 30 years. Nowadays, Goethe might even be considered a mere “one hit wonder”. But what a hit it was! Written against the backdrop of the Age of Enlightenment and the Romantic period, Faust is regarded by some as the greatest work of German literature. Faust marks the origin of the pact with the devil mythos, from which so many derivatives took their inspiration afterwards. Yet aside from the play’s main theme and its central character’s deal with Mephistopheles, there is a side story in Faust Part II which is particularly interesting in light of recent policy decisions. The story revolves around an emperor whose realm is afflicted by economic problems. In an early scene, at a reception at the court, the emperor is acquainted with an unlikely duo consisting of Faust, disguised as Plutus, the Greek god of wealth, and Mephistopheles, disguised as the emperor’s fool. Later in the evening, Plutus tricks the intoxicated emperor into signing a paper note. Unbeknownst to the sovereign, Plutus and the fool promptly print unlimited copies of the paper note which are then circulated throughout the empire, thereby eliminating economic problems. Later on, the emperor realizes that the shortsightedness of Plutus’ solution has created a false sense of prosperity in the realm, which in turn enabled greed and corruption, ultimately leading to a compounding of the economic problems that prevailed and bringing the realm on the verge of rebellion. We think there are striking parallels to be drawn between the money printing metaphor in the play with what happened in the last few months. In effect, by resorting to an unprecedented monetary expansion effort in order to avert an economic crisis that would rival the Great Depression, central bankers have turned into a modern version of Plutus. While we understand that there may have been no other choice, in their attempts to reduce short-term damage, central bankers, whose recent policy actions included massive intervention in the investment grade credit sector, have now socialized large swaths of the financial sector, the consequence of which has been the extreme distortion of the value of a broad range of financial assets. In doing so, they have made a remarkable entrance disguised as Plutus and consummated their own Faustian bargain. Even if the long-term outcome of this bargain may not be as tragic as in Goethe’s play, we prefer to be invested conservatively and to be diversified across a broad range of risk factors rather than chase the financial assets whose value may have been the most artificially inflated. ONE COUNTRY TWO SYSTEMS NO MORE Hong Kong’s current crisis can be traced to the implementation of the 1990 Basic Law, a constitutional law whose purpose was to give effect to the 1984 Joint Declaration between China and the United Kingdom that guaranteed the continuation of Hong Kong’s capitalistic and social freedom system for 50 years following its return to China in 1997. Article 23 of the Basic Law stipulates that Hong Kong is responsible for enacting laws to prohibit treason, secession, sedition and subversion against the Chinese government and bar foreign organizations to conduct political activities in the region. Indirectly, it meant that Hong Kong’s retained its independence but that China would ultimately dictate policy around security and foreign relations. Unfortunately, since its return into China’s lap, Hong Kong has tried and failed repeatedly to implement Article 23 due to public outcry. Its latest attempt, in June of last year, was met with daily widespread protests and demonstrations lasting through late fall. In retrospect, the COVID-19 pandemic provided the distraction that China needed to force the implementation of the missing legislation. To this point, diplomatic attempts to dissuade China from asserting more direct authority over Hong Kong have fallen into deaf ears. Similarly, since China has waited over two decades for this moment, we don’t think that calls for sanctions from countries with assets in the region will have an impact. In fact, a series of recent events suggest that China is less preoccupied by the image that it projects on the international scene than it was 30 years ago, in the aftermath of the Tienanmen Square events. Notably, China is particularly emboldened when it comes to pushing the limits of public international law in the South China Sea. This is an adverse development which few had foreseen. The widely held view was that Deng Xiaoping’s thoughtful “one country, two systems” formula was beneficial for China as it could draw inspiration from Hong Kong’s British heritage in the transformation of its state-controlled economy to a market economy. Evidently, China viewed the situation differently, which raises questions about what comes next. Firstly, what will China’s tighter grip mean for foreign companies operating in Hong Kong? Secondly, are Trump’s United States willing to militarily guarantee the Taiwan’s independence if China’s policy towards Hong Kong sparks the nationalist fervor on the island? Thirdly, how will China react should foreign countries offer fast track visas to the highly skilled citizens of Hong Kong who see China as a menace and choose to emigrate? Answers to these questions could have potentially serious geopolitical consequences. For this reason, our strategy is to approach China and the broader Asian region without taking too much directional risk. As such, we think that this in an area where hedge funds, whether they focus on equity or credit markets, interest rates or currencies, are worth considering. This is a key research focus of ours as a result. DEAD SHOPPING MALLS RISE LIKE MOUNTAINS BEYOND MOUNTAINS The title of this section is a line that we stole from a song by the internationally acclaimed Canadian indie-rock band Arcade Fire . While the decline of the suburban shopping malls had already been chronicled, as COVID-19 rampaged through the world, forcing business closures, their problems only worsened. In retrospect, Arcade Fire was prescient. The reason we mention the shopping mall situation is because the broader commercial real estate sector – publicly listed Real Estate Investment Trusts (REIT) aside – typically comprises a core portion of ultra-high net worth (UHNW) investors allocation to alternative investments and that many UHNW are attempting to assess whether the recent carnage witnessed in the space as an opportunity to increase their exposure. After all, they argue, from a Canadian investor’s vantage point, the commercial real estate sector, has been largely immune to recessionary shocks in the past three decades and until the pandemic hit, it had generally outperformed both equity and fixed income over relatively long periods. While these arguments are undebatable, they are backward looking. To this point, we believe that there are fundamental reasons that underpin the weakness experienced by commercial real estate since March. Firstly, in many sectors, rent collections are at risk. In effect, while such risk appears contained in the traditionally more defensive multi-family residential sector as well as the industrial and storage sector, it is particularly acute in the hospitality, office and retail sectors. We further suspect that even the student housing sector could face problems if college and university campuses do not re-open this fall and that foreign students are frozen at the border. To date, real estate owners and operators have engaged in proactive discussions with their tenants, which have led to the implementation of various rent relief measures. Nevertheless, these measures are temporary and since the commercial real estate sector has not directly been targeted by government and central bank measures to date, we wonder how long can these voluntary measures last and what happens when they expire. Secondly, we note that a many nonbank real estate debt providers such as mortgage REITs, specialty finance companies and hedge funds have significantly curtailed their activities or effectively exited the space. As such, capital for development and repositioning projects has become scarce and more expensive. Ultimately, we think it will cause many commercial real estate owners, operators and developers to prioritize debt reduction over distribution payments and that major expansion projects will be postponed. To summarize, while the opportunity to uncover unique assets which will generate superior outcomes given the depressed valuations may very well be real, the level of uncertainty is unprecedented and the risks of making a costly mistake by increasing exposure too early is high. With that in mind, until we overcome the COVID-19 pandemic, we consider it prudent to focus on the most defensive sectors, use only conservative amounts of borrowing and more importantly, borrow on conditions that cannot be unilaterally amended by the lender. Reassuringly, while we did not deploy capital in the space anticipating a global pandemic, our recently completed investments appear well positioned to withstand the negative influence of the pandemic. To this point, to date, there has been little deterioration in vacancy and rent collection metrics and developers indicate that construction projects remain on time and on budget. Dimitri Douaire, M. Sc., CFA Co-Chief Investment Officer  Johann Wolfgang von Goethe, Faust Part I, published in 1808, and Part II, published posthumously in 1832.  Sprawl II, the Suburbs, released by Merge Records in North America in 2011.  We do not consider publicly listed REITs as alternative investments. We view REITS as equity market investments. 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Montreal, June 30, 2020 One of the most acclaimed role-playing video game from the genre’s golden era is Fallout. In the game, the player’s avatar is tasked to leave the relative safety of an atomic shelter, in which he spent his entire life, to retrieve an essential piece of equipment in the above ground wasteland, one populated by humanoid and animal mutants and where radiation poisoning is a constant threat. Covid-19 is not anything like Fallout’s romanticized wasteland denizens that keep respawning but like them, it is a serious threat about which little is known other than the fact that it has not gone away. For this reason, while deconfinement is vital, immunology and infectious disease experts argue that the process of re-appropriating the outside world should be slow and guarded, or else the lockdowns of the last two months will have been wasted. The Shape of the Recovery has been ‘unmasked’ In a prior post, we noted the growing dissonance between the swift recovery trajectory that the global equity markets implied and the underlying economy. In effect, since the late March lows, broad equity market indices have rebounded substantially while economic activity remains severely impacted. In retrospect, suggesting that the markets were implying a “V shaped” recovery may have been a premature conclusion. To this point, the stocks that had been leading the market advance comprised of a relatively concentrated group of large capitalization information technology, on-line communication and healthcare stocks. The common characteristics of those stocks were that their revenues were not expected to be overly impacted, their net debt was low, and they had high variable cost structure which could sustain a lower level of activity for longer. More recently though, most of these same stocks seem to have reached a plateau while the broader market is now carried higher—at least temporarily—by financials, industrials, consumer discretionary, and, to a lesser extent, by energy firms. The stocks in this second group are more sensitive to the prevalence of social distancing measures, are sometimes heavily indebted and have little to no flexibility to reduce cost rapidly. We note, interestingly, that this shift in sentiment is happening at the same time as European and North American countries have started to ease lockdown restrictions and that the number of deaths keeps declining in spite of a resurgence in the number of Covid-19 cases. In fact, there are encouraging developments on the therapeutic front. At the same time, higher frequency indicators measuring air traffic, passenger car miles driven, public transportation capacity factors, box office receipts, and restaurant and hotel bookings all suggest that the economy has bottomed. Lastly, while weekly unemployment claims remain elevated, continuing claims have started to decline, which means that corporations have started to rehire workers. In a sense, these positive developments justify the transition of market leadership away from companies which are less Covid-19 sensitive, to companies which are more sensitive to it. As it stands, we do not know whether a sudden increase in Covid-19 cases would cause the group of stocks that benefitted in the early stages of the recovery to start outperforming again. Nonetheless, we do not think it is prudent to assume that large cap information technology stocks and ancillary plays will always constitute sound hedges against a severe recessionary scenario. For that, we believe that the US dollar, long-term government bonds and precious metals are better suited. Ethical and Environmental, Social and Governance (ESG) strategies having their day Asset owners have become increasingly interested in the ESG profile of their holdings. To this point, Morningstar reported that net inflows into sustainable mutual funds and exchange-traded funds more than quadrupled in 2019 from 2018. In addition to the general concern with climate change, we believe that the adoption of ESG conscious investment principles has been partly sparked by the strong performance of ESG strategies recently, which is seen as the confirmation of the premise that an ESG approach to investing does not force investors to sacrifice return. However, an investigation into the approach utilized to construct ESG indices reveals that performance may have more to do with factors other than ESG factors themselves. In effect, taking for instances the popular MSCI ESG Leaders range of indices, we note that two sets of filters are applied. One filter in the indices construction methodology is an ethical filter, which leads to the exclusion of certain industries outright, such as the tobacco manufacturing industry. Since the connection between smoking and terminal lung diseases has been established, the tobacco industry has been structurally contracting. Consequently, notwithstanding the high dividend that most tobacco manufacturers are still able to pay, their stock price has declined substantially in the past couple of years. Other groups of companies that tend to be excluded are those involved in the manufacturing of firearms and those that are subject to various controversies such as child labor. Coincidentally, many of those happen to be industrial conglomerates which are facing their own challenges ranging from balance sheet stress to fundamental changes in the way contracts are attributed. The stock price of members of this industry subgroup has also trailed the broader indices considerably in the recent years. As a result, the decision to exclude a subset of stocks which happen to have been experiencing a secular decline on the grounds that such stocks do not meet socially responsible investing criteria, would have been enough to generate a noticeable positive contribution to performance. Furthermore, the other filter applied consists in altering the weight of the remaining stocks, positively or negatively, as a function of their respective score on various ESG metrics. Invariably, companies with the highest carbon footprint tend to be penalized. Therefore, the energy and basic materials sector tend to be underweight and since the price of commodities such as oil and copper is hovering nearly their decade lows, all else equals, the underweighting of companies engaged in the extraction of natural resources has also been a positive contributor to performance. Conversely, companies in the information technology, healthcare and biotech industries which tend to have a low carbon footprint, tend to be favored and get overweight. Essentially, by construction, these ESG indices and the strategies that are derived from them tend to be naturally underweight industries which are facing secular headwinds, and overweight information technology and healthcare sectors. Interestingly, the same characteristics are present in large-cap growth focused strategies. In fact, we have found that many ESG strategies have behaved like diluted versions of large-cap growth strategies. More cynically, to the extent that investors choose to adopt ESG strategies, it will be more a consequence of their large-cap growth stocks driven performance than the desire to invest in companies that are doing more “good”. Moreover, we have another issue with ESG indices and strategies. It appears that in some cases, the E, S and G factors in ESG are mutually exclusive. For example, a Silicon Valley technology company may score highly on the environmental pillar because it causes little direct pollution through its activities but may score poorly on the governance pillar due to issues surrounding executive pay and ongoing questions about the protection of customer privacy. Conversely, a mining company that employs various chemicals that contaminate a nearby aquifer will score poorly on the environmental spectrum but may still gain index membership since it has a diverse board and pays its employees above average. In other words, it is possible for a company to score poorly on one or two of the three ESG pillars to acquire membership in an ESG index. Unfortunately, these are considerations that are not necessarily transparent to asset owners. Ultimately, we would conjecture that the E, S or G-only indices that have recently emerged—in an effort to target specific asset owner sensitivities and reduce the presence of inherent conflicts between the three pillars—may be the answer to an unfulfilled promise. On our end, we believe that ESG concepts have fundamental merits. That being said, we are conscious of the pitfalls identified above and do not want to rely on recent performance to build an investment case. With that in mind, we continue to scrutinize the universe search for an implementation approach without too much compromise. The Relative Passivity of Active Managers Active portfolio management is defined by an investment approach that focuses on outperforming a specific market index through security selection, sector allocation, or market timing. The marginal value of active portfolio management strategy has been intensely debated in recent years and we doubt that their performance during the first quarter of this year will do anything to cause the debate to recede. In essence, the performance of active equity and fixed income managers has once again disappointed in the first quarter. Notably, the median active Canadian equity manager underperformed the S&P TSX Composite Index and the median international equity manager underperformed the MSCI EAFE Index. On the fixed income side, the median manager underperformance relative to the FTSE TMX Universe was abysmal from a historical perspective. This has prompted many investors to question the purpose of active managers if, on aggregate, they largely failed to deliver superior performance in the years leading to the Covid-19 meltdown, and during the meltdown. Admittedly, the empirical data makes active managers harder to defend. To this point, apart from a reduction in the count of non-core portfolio positions, which led to minor increases in the level of cash present in some manager portfolios, there were no broad reshuffling of portfolio exposures. In other words, active managers have been, on average, uncharacteristically… passive. Nevertheless, we remain hesitant to condemn active managers based on the actions committed—or lack thereof—at the outset of the pandemic. We know that great managers may look temporarily out of sync when a new paradigm emerges. Please keep in mind that Warren Buffet’s Berkshire Hathaway had his worst performance in a decade versus the S&P 500 Index in 2019, and 2020 is not shaping up to be much better. We also know that mediocre or novice managers can look brilliant if presented with the right environment. Case in point, David Portnoy, the Barstool Sports founder who started to look at the stock market a few months back, is turning into an investment celebrity. We saw similar patterns in 1999 and again in 2007. It may be happening again. Currently, we are prepared to dismiss active managers recent performance on the grounds that the market decline ensuing the Covid-19 trauma was unprecedented. We are even prepared to excuse the underperformance of active managers early in the recovery, on the grounds that it was more liquidity induced than fundamentally induced. Nonetheless, we think that active managers have just been granted an opportunity to outperform markets not seen in a generation. More specifically, now that so many publicly listed companies have suspended the communication of guidance for revenues, margins, and earnings, the basic extrapolation techniques that so many still cherish may no longer work. As such, analysts and portfolio managers, who can develop a deeper understanding of public companies’ operating environment and have superior insights about the companies’ relative ability to endure revenue decline or withstand margin erosion, may have the high ground. In a way, the active managers’ current crisis could be sowing the seeds of their catharsis. Many industries have suddenly fallen in a precarious state. Restaurants, hotels, cinemas, airlines, theme parks, cruise line operators, and live entertainment content providers are among those. Sadly, Hertz Global Holdings, whose problems have become public recently, perhaps best epitomizes the situation. Hertz, which celebrated its centennial two years ago, successfully overcame numerous adverse scenarios since its foundation. Yet Hertz derives the essential of its revenues from short-term car rentals and is heavily indebted. From our perspective, given the Covid-19 outbreak and restrictions on business travels, a balance sheet restructuring became inevitable and indeed, the company filed for bankruptcy on May 22nd. Hertz is just one example of a company which saw its business model toppled by Covid-19 at a time when it did not have a sufficient financial cushion. It is not alone in this situation, as many companies face equally worrisome prospects. To reiterate our earlier point, we believe active managers have a unique occasion to redeem themselves by successfully identifying the winners and losers of the Covid-19 pandemic. As such, we have become more enthusiastic about the prospects of active managers than we have been in quite a while. To be specific, we are paying particular attention to managers who have delivered excess returns in episodes during which the distribution of financial asset price variation was wide and who have remained faithful to the investment beliefs and principles that have allowed them to outperform in the first place. Dimitri Douaire, M. Sc., CFA Co-Chief Investment Officer  Fallout™, developed by Black Isle Studios and published by Interplay, 1997.  Non-essential goods and services.  John Hale, “Sustainable Fund Flows in 2019 Smash Previous Records”, Morningstar: Sustainability Matter, January, 10, 2020.  MSCI, “MSCI Choice ESG Screened Index Methodology”, April 2020.  Patrimonica, eVestment data for Q1-2020.  Ibid. – Europe, Australiasia and Far East (EAFE). Photo credit