April - Benefits and Pensions Monitor

Dear Plan Sponsor,
Marret Asset Management Inc. is an employee-owned firm specializing in the analysis of higher
yielding corporate securities. The firm was founded in 2000 in Toronto and accepted its first
pension account in 2001.
Non-investment grade corporate debt is a separate and distinct asset class with a unique return,
risk and correlation profile. We believe that the only viable model for investing in high yield
corporate debt is to do it full-time. The intricacies of the asset class demand a dedicated team of
analysts. Marret has the largest high yield team and a depth of experience that is unrivalled in
Canada. We invest in the bonds of operating companies across all industries and our analysts
focus on specific industry sectors in which they have expertise.
For investors considering tactical allocations to the asset class, we think the current environment
is setting-up a unique entry point. High yield credit spreads, using the Merrill Lynch High Yield
Master II index, peaked at 2,182 basis points over Treasuries on December 15, 2008. The 1,941
basis point widening from the historic tights of 241 basis points on June 5, 2007 was
unprecedented (as were many things this cycle). In prior recessions, high yield spreads peaked at
1,000 to 1,100 basis points.
On the risk side of the equation, the speculative grade default rate, as measured by Moody’s
Investors Services, was 5.15% in January, but is moving quickly towards prior recessionary
peaks of 12-13%. Depending on recovery assumptions (which we think have to be much lower
this cycle) current spreads are discounting much higher losses – nearly twice that experienced
during the Great Depression. We believe that current spreads reflect an enormous liquidity
premium due to massive de-leveraging of the financial system and will lead to the highest returns
ever, both absolute and risk adjusted.
High yield is an early cycle asset class. In the first two years coming out of the last three
recessions, the compound annual return of the Merrill Lynch High Yield Master II index has
handily beaten or matched the return of the S&P 500. The first year out of recession, including
2003, typically has an index return in the 25% to 30% range. The turmoil of today, while not yet
over, is the lead in to this type of return for the asset class.
If you would like more information, please contact me at 416-214-5800.
Best Regards,
Barry Allan,
President & Chief Investment Officer
150 King Street West, Suite 2304, P.O. Box 22, Toronto, Ontario, M5H 1J9