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In our Q2-F26 Quarterly Check-In, our Portfolio Manager Sam LaBell is joined by Eden Rahim, Portfolio Manager of the Veritas Next Edge Premium Yield Fund.
Sam reviewed the performance of our three funds: the Veritas Canadian Equity Fund (a long-only strategy), the Veritas Absolute Return Fund (a long-short strategy), and the Veritas Next Edge Premium Yield Fund (Veritas subadvisor, which targets an annualized distribution of 8% paid monthly using an actively managed covered options strategy).
Sam also provides analysis of the three biggest components of the Canadian index (financials, materials, and energy), while Eden discusses the covered call strategy of the Veritas Next Edge Premium Yield Fund and his focus on shorter-dated options (four weeks or less). Eden also presents several macro charts indicating potential market leadership changes on the horizon.
Highlights
00:00 Fund Overview and First Half Positioning
Sam presents the performance of Veritas’s three funds, emphasizing their goal of providing lower-volatility solutions. He also discusses the positioning of our funds heading into the year.
10:58 Canadian Bank Valuation Analysis
Sam presents a detailed analysis of Canadian bank valuations, showing that they have historically traded at a discount to US S&P 500 banks. However, two significant changes have occurred: Canadian bank forward ROEs increased from a 15-16% range to 15-19%, and the traditional discount to US banks has disappeared. He also addresses the debate between holding banks versus life insurance companies.
17:39 Precious Metals Fundamentals and Gold Analysis
Sam presents his analysis of gold prices relative to U.S. GDP since 1970 and analyzes five sources of gold demand, including ETFs. He notes that mining companies show strong fundamentals, with EBITDA margins expanding and disciplined Capex spending, creating significant free cash flow generation even at lower gold prices.
23:35 Oil Market Analysis and Strait of Hormuz Crisis
Sam reviews why oil hasn’t risen higher amid the Hormuz Crisis, as well as why he doesn’t think investors should get too comfortable that prices will come down when the U.S. attacks end.
29:13 Second Half Positioning Strategy
Sam is maintaining a similar philosophy to the start of the year, with continued underweight in the Big Six banks and increased caution in energy due to expected continued volatility without sustained price increases needed for energy outperformance. “We’re starting to view the bull market as a bit more extended, so shifting towards yield plays is a good precaution. Utilities and pipelines remain very attractive positions, both of which are offering a little bit more growth than the last couple of years.”
30:22 Introduction to Options Strategy
Eden explains the concept of trading uncertain upside potential for certain yield by writing out-of-the-money call options. “The point is to turn volatility into yield, and along the way, it is a very tax-efficient strategy.” He notes that covered calls work well in at least three of five market conditions (range-bound, gentle decline, rapid decline). Even in gradual rises, it works well, with only rapid advances causing underperformance.
37:10 Options Strategy Methodology
Eden explains how he prioritizes theta (time decay) by writing shorter-dated options of four weeks or less, preferentially three weeks, where options lose value fastest. Eden emphasizes that the approach aims to balance yield enhancement with allowing Veritas’s research to come to fruition, rather than being “yield hogs” that impair stock appreciation potential.
38:55 Implied Volatility-Based Option Writing
Eden demonstrates their methodology of writing options based on implied volatility rather than fixed percentages out-of-the-money. This approach ensures appropriate risk-adjusted option writing based on each stock’s expected volatility rather than arbitrary percentage targets, allowing stocks to appreciate significantly while still capturing meaningful option premiums.
41:30 Long-term Macro Factors and Market Leadership Changes
Eden presents several long-term charts indicating potential market leadership changes: 1) Low-volatility ETF versus high-beta ETF ratio, 2) 30-year value versus growth chart, 3) The MAG 7 versus S&P 493, 4) Peaks in margin debt, 5) TIPS ETF to Treasury ETF ratio as a leading indicator of inflation expectations, 6) Individual stock volatility versus market volatility. and 7) Seasonal volatility. “There are tectonic plates that are moving beneath the surface that we’re unaware of, and that tends to happen at leadership changes in the marketplace.”
