Fund Manager
Eric Dzuba
Global equity markets, corporate bond markets, and commodities continued the rally begun late in Q1 2009 as “less bad” economic reports coupled with improved credit markets and a belief that the world economy was not plunging into an abyss.
The positive return of the TSX this quarter marks the first positive quarterly return in a year. Over the quarter, the Fund gained 5.9 per cent.
Index gains were driven by contributions from the Technology (basically, Research in Motion), Financials and Energy sectors. In the Fund, a paired (long/short) position that was intended to capture the valuation discrepancy between insurance and banks in Canada did well over the quarter, but would have been more profitable if not for a surprise announcement by Manulife Financial Corp. in June. Investors sold off the stock on concerns that the company’s intention to strengthen its balance sheet would come at the expense of future earnings. Other contributors to the Fund’s performance over the quarter included Arc Energy Trust, power producer Boralex Inc. and energy infrastructure trust Altagas Income Trust.
The fund’s income investments benefited from the significant spread tightening that occurred late in the quarter. Removing hedges against some of the convertible debenture positions late in Q1 allowed the Fund to benefit from price increases. By June we began trimming positions that were trading at par, or higher, given that they had become fully valued as “credit instruments” (i.e. They remained significantly out of the money) while also looking at companies/ trusts that are looking to “reset” their convertible paper by issuing new convertibles with a lower conversion premium and attractive coupons. The Fund continued to add to its holdings of investment grade (generally BBB) corporate bonds over the quarter.
The short position against a benchmark Government of Canada bond that was initiated at the beginning of the year was largely closed out. The spread between it and the high-quality bank-sponsored asset-backed securities that the fund went long, came in considerably, making the trade very profitable.
By the end of the quarter, equity markets were beginning to “take a breather”, giving back some of the gains over the previous three months. Investors have been counting on stimulus spending from China to generate growth in that country and subsequently keep the global economy moving. Undoubtedly, imports of hard commodities such as coal, iron ore and copper have been robust. But questions are arising as to whether China is simply stockpiling these items, or intends to consume them in the near term. Investors will also spend the summer weighing where Q2 earnings come in and where companies are guiding to for the rest of 2009, and looking for evidence that economic “green shoots” can become something more than just sprouts.
The easy move in equities and credit has happened, as consensus has moved away from “apocalypse” to “recession”. The next leg up for equities will be far more difficult, as investors will have to see evidence of economic growth against a backdrop of growing government debt, the likelihood of both higher taxation and stricter regulation.
Eric Dzuba
Eric Dzuba - Q2 2009 Commentary
Date Published
Fund Manager
Global equity markets, corporate bond markets, and commodities continued the rally begun late in Q1 2009 as “less bad” economic reports coupled with improved credit markets and a belief that the world economy was not plunging into an abyss.
The positive return of the TSX this quarter marks the first positive quarterly return in a year. Over the quarter, the Fund gained 5.9 per cent.
Index gains were driven by contributions from the Technology (basically, Research in Motion), Financials and Energy sectors. In the Fund, a paired (long/short) position that was intended to capture the valuation discrepancy between insurance and banks in Canada did well over the quarter, but would have been more profitable if not for a surprise announcement by Manulife Financial Corp. in June. Investors sold off the stock on concerns that the company’s intention to strengthen its balance sheet would come at the expense of future earnings. Other contributors to the Fund’s performance over the quarter included Arc Energy Trust, power producer Boralex Inc. and energy infrastructure trust Altagas Income Trust.
The fund’s income investments benefited from the significant spread tightening that occurred late in the quarter. Removing hedges against some of the convertible debenture positions late in Q1 allowed the Fund to benefit from price increases. By June we began trimming positions that were trading at par, or higher, given that they had become fully valued as “credit instruments” (i.e. They remained significantly out of the money) while also looking at companies/ trusts that are looking to “reset” their convertible paper by issuing new convertibles with a lower conversion premium and attractive coupons. The Fund continued to add to its holdings of investment grade (generally BBB) corporate bonds over the quarter.
The short position against a benchmark Government of Canada bond that was initiated at the beginning of the year was largely closed out. The spread between it and the high-quality bank-sponsored asset-backed securities that the fund went long, came in considerably, making the trade very profitable.
By the end of the quarter, equity markets were beginning to “take a breather”, giving back some of the gains over the previous three months. Investors have been counting on stimulus spending from China to generate growth in that country and subsequently keep the global economy moving. Undoubtedly, imports of hard commodities such as coal, iron ore and copper have been robust. But questions are arising as to whether China is simply stockpiling these items, or intends to consume them in the near term. Investors will also spend the summer weighing where Q2 earnings come in and where companies are guiding to for the rest of 2009, and looking for evidence that economic “green shoots” can become something more than just sprouts.
The easy move in equities and credit has happened, as consensus has moved away from “apocalypse” to “recession”. The next leg up for equities will be far more difficult, as investors will have to see evidence of economic growth against a backdrop of growing government debt, the likelihood of both higher taxation and stricter regulation.
Eric Dzuba