Fund Manager
Eric Dzuba
TSX managed a 2.5% gain in the quarter, largely a result of a strong March rally in financial shares. Over the last six months, the equity index advanced 5.6%. This move, in Canada, was driven by financials, materials (base materials), and select industrials
stocks. The yield on the Government of Canada 10-year bonds changed little over the quarter, although this figure has been trending higher to reflect stronger economic news in this country.
Investors have become enamored with “all things yield”; a reaction to the volatility in financial markets in 2008-2009. Money flows into fixed income and balanced mutual funds have been strong, likely reflecting investor preference for being higher up in the capital structure should things go wrong in the future. As a result, yields — both fixed income and dividend — are being compressed, and it is becoming difficult to find attractively valuedsecurities.
The fund returned 3% in the first quarter, driven by a diverse set of holdings. Two examples include the Fund’s contrarian play in Yellow Pages Income Fund, which began to pay off in the quarter, as the trust
announced its plan to convert to a corporation, posted decent Q4 results, continued to improve its balance sheet, and bought a competitor. Profits were taken on the fund’s coal positions. Western Coal Corp. was sold late in the quarter, following an 80% share price appreciation since the beginning of the year. Westshore Terminals Income Fund has been trimmed, as it has appreciated on news it renegotiated its loading agreement with Teck Resources Ltd., providing more clarity on future cash flows, as well as the likelihood that distributions will be above consensus.
The other factor in this rising market is that there are few new opportunities. The focus remains on buying well, as opposed to hoping that market momentum will carry prices higher. While the economy, as measured by encouraging GDP numbers and
improving manufacturing conditions, looks better, there are still spots of weakness as overall
unemployment remains high.
The macro risks have to be considered as governments have generally run out of bullets in dealing with crisis situations. Over the mid-to longerterm, we cannot hide from the fact that indebtedness incurred over the last few years to
provide emergency liquidity, and stimulus has to be paid back. Developed nations cannot avoid slower growth as higher taxation, lower government spending and a growing retiree population pressures GPD. The trick over the next two to four quarters, for
both equity and fixed income managers, will be in balancing the outlook for both short and longer-term
economic growth, expectations for corporate earnings growth and the possibility that interest rates
might rise sooner and faster than investors had anticipated at the start of the year.
While we cannot ignore macro events and trends, the Fund is managed on a bottom-up, name-byname basis for both equity and fixed income securities. This patient selection of securities provides another layer of diversification from broad market trends, in addition to the Fund’s relatively flexible mandate and long/short capability.
Eric Dzuba - Q1 2010 Commentary
Date Published
Fund Manager
TSX managed a 2.5% gain in the quarter, largely a result of a strong March rally in financial shares. Over the last six months, the equity index advanced 5.6%. This move, in Canada, was driven by financials, materials (base materials), and select industrials
stocks. The yield on the Government of Canada 10-year bonds changed little over the quarter, although this figure has been trending higher to reflect stronger economic news in this country.
Investors have become enamored with “all things yield”; a reaction to the volatility in financial markets in 2008-2009. Money flows into fixed income and balanced mutual funds have been strong, likely reflecting investor preference for being higher up in the capital structure should things go wrong in the future. As a result, yields — both fixed income and dividend — are being compressed, and it is becoming difficult to find attractively valuedsecurities.
The fund returned 3% in the first quarter, driven by a diverse set of holdings. Two examples include the Fund’s contrarian play in Yellow Pages Income Fund, which began to pay off in the quarter, as the trust
announced its plan to convert to a corporation, posted decent Q4 results, continued to improve its balance sheet, and bought a competitor. Profits were taken on the fund’s coal positions. Western Coal Corp. was sold late in the quarter, following an 80% share price appreciation since the beginning of the year. Westshore Terminals Income Fund has been trimmed, as it has appreciated on news it renegotiated its loading agreement with Teck Resources Ltd., providing more clarity on future cash flows, as well as the likelihood that distributions will be above consensus.
The other factor in this rising market is that there are few new opportunities. The focus remains on buying well, as opposed to hoping that market momentum will carry prices higher. While the economy, as measured by encouraging GDP numbers and
improving manufacturing conditions, looks better, there are still spots of weakness as overall
unemployment remains high.
The macro risks have to be considered as governments have generally run out of bullets in dealing with crisis situations. Over the mid-to longerterm, we cannot hide from the fact that indebtedness incurred over the last few years to
provide emergency liquidity, and stimulus has to be paid back. Developed nations cannot avoid slower growth as higher taxation, lower government spending and a growing retiree population pressures GPD. The trick over the next two to four quarters, for
both equity and fixed income managers, will be in balancing the outlook for both short and longer-term
economic growth, expectations for corporate earnings growth and the possibility that interest rates
might rise sooner and faster than investors had anticipated at the start of the year.
While we cannot ignore macro events and trends, the Fund is managed on a bottom-up, name-byname basis for both equity and fixed income securities. This patient selection of securities provides another layer of diversification from broad market trends, in addition to the Fund’s relatively flexible mandate and long/short capability.