Saturday, February 27, 2021Canada's Leading Online Business Magazine

Rival Capital Management Inc.

Disciplined asset manager

Like many startup companies, Winnipeg-based Rival Capital Management Inc. began as an idea from an industry experienced executive looking to branch into a new project. With that, Rival Capital Management Inc. (Rival) was born in 2007, the brainchild of Tony Warzel, President and CEO.

Prior to 2007, Warzel spent the past decade with assurance firm Great West Life. Tony was responsible for various funds with Great West Life, but his real passion was the small cap fund that he ran at Great West Life. Warzel’s frustration with large firm restrictions ultimately led him to execute his idea of Rival, a smaller company that would utilize all the tools available to it while not putting any restrictions on the cash and/or sectors he had to invest in. This new working structure allowed Warzel to offer a more flexible product that would be complementary to existing funds that were currently offered in the marketplace. In September 2010, Jim McGovern joined Rival as Managing Director, bringing more than 25 years of capital markets experience. His focus is primarily on the business development and all aspects of the firm’s sales and marketing initiatives.

Starting up during the recession

Considering its industry, it is impressive to note that Rival was founded just prior to a time when many in the market were feeling its economic pinch. The company attributes its success through this time to a variety of factors, including its investment process, its stance toward risk management, as well as its overriding business philosophies.

Rival began in a similar timeframe to that of the economic recession, and while market tremors were certainly evident, potential difficulties—underperforming banks and increasing volatility—within those markets were minimized from a microeconomic standpoint.

One area, as mentioned, that has certainly played a role in the vast organizational growth of the company is its investment process which, over time, has served as a strength for the company. The investment process of Rival has proven to be a winning process for the firm, and the discipline within that process is not understated by Rival. In fact, it is a key reason why the company has outperformed in its short history.

Investment process

As a top-down manager, Rival begins with a macroeconomic outlook and then, from there, the company utilizes its proprietary technical and quantitative screens finding stocks with characteristics fitting the mold that Rival believes has all the characteristics of a good growth stock. These characteristics include earnings growth, sales growth, positive price momentum, etc., which provides a starting point for Warzel and McGovern to begin researching names to potentially add to the portfolio of the Rival funds.

These names are then narrowed down by the company through its fundamental efforts, deciding if these names fit with the company’s macro overview and if the fit exists from a portfolio standpoint. From that the candidates with the most favorable fundamental, technical and quantitative characteristics end up creating Rival’s portfolio.

Warzel summarized, “We look at companies with good fundamentals, whether the company is growing, if the stock looks good and, if it does, it makes its way into the portfolio.”

Competitive advantage

Rival Capital Management Inc. strives to create strong relationships with its clients. These relationships are based on their client’s understanding of Rival’s process and how a small cap alternative equity strategy can be very complementary to their existing total equity portfolio.

“We have a lot of loyalty from the clients we have, as they see that our discipline works and they understand it,” Warzel said. “Our strong existing client base lays a good foundation for future growth.”

Rival believes that one of its main competitive advantages lies in its investment process. Rival’s small cap focus, risk management process, and tight limits in place to reduce leverage risk gives the firm a unique product offering. This coupled with a focus on keeping the portfolio “right sized”, not “large sized”, allows Rival to be fluid investors. McGovern is quick to point out that Rival uses leverage as a tool, not as a strategy, something that separates the company from others in the industry. The firm uses all tools available at its disposal, using leverage as a tool in opportunistic times. A key process at Rival, is that the company has such a strong focus on its risk management process and in using these tools it has available.

One of those tools is cash, and Rival does not cap the amount of cash in its portfolio, compared to most standard funds which limit this figure to five or 10 per cent. Cash as a tool is attributed to helping Rival withstand market pressures successfully during the last recession.

Risk management

McGovern spoke glowingly about the risk management philosophy of Rival Capital Management Inc., a philosophy that is different from the industry norm.

“Money managers spend a lot of time analyzing names to put into the portfolio, but sometimes they struggle to make that decision to exit,” McGovern explained. “At Rival, we are continually screening our existing portfolio to ensure that all the names we own still demonstrate the characteristics that put them in the portfolio in the first place. We know selling is a tough thing to do so we want a strong discipline to take as much of the emotion out of the process as possible.”

Warzel describes the risk management philosophy of Rival Capital Management Inc. as “regimented”, and it is regarded as the biggest strength of the company.

“If we have a losing stock, we sell it, because the market is telling us that we made a mistake,” Warzel commented. “We try to listen to the market and let it dictate what we’re going to do and not become emotionally attached to a stock.”

Stop losses, with a range of 10 to 15 per cent, as part of the discipline of Rival highlight the value of the company’s risk management philosophy.

For example in 2008, “We weren’t putting a lot of money to work and we were getting taken out of positions because of our stop losses,” Warzel said. “We weren’t putting money to work because we weren’t finding attractive opportunities on the other side. As 2008 progressed, we were taking out our names and we weren’t going into other names. In the fourth quarter of 2008, we were running very high cash balances. When stocks started rolling over and things started coming apart in the markets, our discipline was taking us out of stocks. When a stock was down 10 to 15 per cent, we sold it.”

Today, Rival is focused on one fund, with the goal to ensure that it is kept at an optimal size for its unit holders. McGovern summarized, “The main goal is to put ourselves in the best possible position to make the most money for our unit holders and keep the fund at that optimal size.”

McGovern said, “We don’t go in to our clients and be one-stop shopping. We’re looking for a small sliver of their equity spend. We are a very good complementary fund to their existing typical long-only fund.”

“We’re continuously screening the portfolio for names that should come out, and screening the market for names that should come in,” Warzel concluded.

“This is a fluid process that is constantly evolving and it is fairly disciplined. Our size gives us our advantage. We’re not a very large fund, so we can execute this strategy as it was intended. We can get out of or into a name very quickly. This is one of the key competitive advantages of Rival Capital Management Inc.”