Fund Manager
Eric Dzuba
It was the worst of times, it was the best of times.
In terms of economic news flow, the best we could do was claim that it had become “less bad” by the end of the first quarter. To this end, equities started the quarter off strong in January. It then proceeded to fizzle out in February, when continued poor economic news accompanied a lack of direction from the U.S. government in terms of a plan to support that country’s banking system. In mid-March, one of the biggest monthly moves on the TSX in the last several years took hold.
In fact, March’s return of 7.35 per cent was the first positive month for the TSX since August 2008. This move was not enough to bring the Canadian index into a positive territory for the year, as it fell about 3 per cent in the first quarter. Over the quarter, the fund gained 1.4 per cent.
Index gains were driven by contributions from the Materials and Technology sectors. Unfortunately, these are two sectors in which the fund has historically been underweight. Underweight does not mean zero exposure. Even though, as a result of our agricultural theme, materials holdings such as Agrium Inc., Archer Daniels Midland Co. and CF Industries Holdings Inc., contributed positively to the quarter’s performance. Our energy holdings were also a benefit to the Fund this quarter. Similar to agricultural products, energy is “stuff” that people need to consume, and is difficult to replace. Other equity and debt exposure is to multifamily residential properties. As the song goes: “Look for the bare necessities, the simple bare necessities…”
Our arbitrage book was modest this quarter, successfully closing Rohm and Haas Co – Dow Chemicals Inc. merger, and the privatization of Instorage REIT. In the first quarter, we started to see larger deals such as: pharmaceutical giants Merck & Co. Inc., and Schering-Plough Corp., as well as Suncor Energy Inc. and Petro-Canada in the Canadian oil patch. We continue to believe that balance-sheet stress will continue to generate merger activity, particularly in the resource space, as the year progresses.
The Fund’s income investments did not change materially over the quarter. Modest additions were made to the holdings of Canadian convertible debentures, including those issued by a business trust, a utility trust and an energy company. Short positions, acting as hedges against the debentures, were removed part way through the quarter. A short position was also initiated against a benchmark Government of Canada bond, as the ongoing supply of government bonds issued while governments spend to boost the economy, will likely pressure yields over time. Bond investors face two unpleasant possibilities: oversupply, as seen by the difficulty in the U.S. and U.K. Treasury auctions in late March, and the possibility that stimulus spending works (inflation). Against the short government bond position, we have been buying high-quality bank sponsored asset-backed securities to profit from the spread.
The market could continue to rally as economic news becomes “less bad”. One item to watch over the next several quarters, and perhaps even longer, will be the amount and degree of regulation to follow the growing government intervention in the global economy. Time will tell just what the “new normal” will look like, in terms of the ability of developed economies to grow in the face of calls for more regulation of lenders and other financial market participants.
Eric Dzuba - Q1 2009 Commentary
Date Published
Related Fund(s)
Fund Manager
It was the worst of times, it was the best of times.
In terms of economic news flow, the best we could do was claim that it had become “less bad” by the end of the first quarter. To this end, equities started the quarter off strong in January. It then proceeded to fizzle out in February, when continued poor economic news accompanied a lack of direction from the U.S. government in terms of a plan to support that country’s banking system. In mid-March, one of the biggest monthly moves on the TSX in the last several years took hold.
In fact, March’s return of 7.35 per cent was the first positive month for the TSX since August 2008. This move was not enough to bring the Canadian index into a positive territory for the year, as it fell about 3 per cent in the first quarter. Over the quarter, the fund gained 1.4 per cent.
Index gains were driven by contributions from the Materials and Technology sectors. Unfortunately, these are two sectors in which the fund has historically been underweight. Underweight does not mean zero exposure. Even though, as a result of our agricultural theme, materials holdings such as Agrium Inc., Archer Daniels Midland Co. and CF Industries Holdings Inc., contributed positively to the quarter’s performance. Our energy holdings were also a benefit to the Fund this quarter. Similar to agricultural products, energy is “stuff” that people need to consume, and is difficult to replace. Other equity and debt exposure is to multifamily residential properties. As the song goes: “Look for the bare necessities, the simple bare necessities…”
Our arbitrage book was modest this quarter, successfully closing Rohm and Haas Co – Dow Chemicals Inc. merger, and the privatization of Instorage REIT. In the first quarter, we started to see larger deals such as: pharmaceutical giants Merck & Co. Inc., and Schering-Plough Corp., as well as Suncor Energy Inc. and Petro-Canada in the Canadian oil patch. We continue to believe that balance-sheet stress will continue to generate merger activity, particularly in the resource space, as the year progresses.
The Fund’s income investments did not change materially over the quarter. Modest additions were made to the holdings of Canadian convertible debentures, including those issued by a business trust, a utility trust and an energy company. Short positions, acting as hedges against the debentures, were removed part way through the quarter. A short position was also initiated against a benchmark Government of Canada bond, as the ongoing supply of government bonds issued while governments spend to boost the economy, will likely pressure yields over time. Bond investors face two unpleasant possibilities: oversupply, as seen by the difficulty in the U.S. and U.K. Treasury auctions in late March, and the possibility that stimulus spending works (inflation). Against the short government bond position, we have been buying high-quality bank sponsored asset-backed securities to profit from the spread.
The market could continue to rally as economic news becomes “less bad”. One item to watch over the next several quarters, and perhaps even longer, will be the amount and degree of regulation to follow the growing government intervention in the global economy. Time will tell just what the “new normal” will look like, in terms of the ability of developed economies to grow in the face of calls for more regulation of lenders and other financial market participants.