Fund Manager
Eric Dzuba
The second quarter proved difficult for many investment strategies across several asset classes. Worries about a double-dip recession impacted both developed and emerging markets; concerns stemmed from fears about sovereign debt risk and the likely fiscal contractions that will be necessary to manage sovereign debt levels. Developed nations cannot avoid slower growth as higher taxation, lower government spending, and a growing retiree population pressures GDP. Spikes in volatility in May and June impacted equities, currencies and, in a positive fashion, treasuries.
Over the quarter, the Fund lost 2%, compared to a 6% loss on the S&P/TSX Composite Index. Small-and mid-cap holdings were disproportionately impacted by the quarter’s volatility. The Fund only had minimal exposure to the telecom sector; a group that likely received fund flows from investors fleeing financials. The Fund also held no shares in gold mining companies, which were positive contributors to the TSX over the quarter.
The Fund continued to reflect its discipline of buying attractively-priced equity and debt securities and seeking mispricing between securities. To this end, the Fund accumulated positions in a global agribusiness and food company (Bunge Ltd.), a grain handling and marketing firm (Vitera Inc.), and a loyalty management services company (Groupe Aeroplan Inc.).
The Fund also used the volatility of May and June to buy back the units of Westshore Terminals Income Fund that were sold in the first quarter. Holdings in Yellow Pages Income Fund and Consumer Waterheaters Income Fund were sold, as both reached prices that fully reflected investor expectations.
The great debate about inflation versus deflation (or, maybe less dramatically, economic stagnation and economic growth) is readily seen in the equity market. In Canada, three moves of 7-8% occurred in the first six months of 2010. Perhaps the lack of direction from equities and a challenging macro environment have resulted in the continued flow of funds to fixed-income securities. Credit spreads are decent, reflecting falling default levels, but are generally demonstrating fair value for these bonds. Treasury securities in Canada at the end of the quarter reflected very low real returns. Unless we fall into a deflationary spiral, holders of these bonds will be very disappointed with their returns.
The Fund remains defensively positioned, as this recovery in asset markets and valuations still assumes that many things will succeed. This is a different type of “Goldilocks”, in that we can’t afford “too hot” or “too cold”. Having said this, there are and will continue to be opportunities in which the Fund can capitalize in order to deliver sound, risk-adjusted returns to investors.
Eric Dzuba
Eric Dzuba - Q2 2010 Commentary
Date Published
Fund Manager
The second quarter proved difficult for many investment strategies across several asset classes. Worries about a double-dip recession impacted both developed and emerging markets; concerns stemmed from fears about sovereign debt risk and the likely fiscal contractions that will be necessary to manage sovereign debt levels. Developed nations cannot avoid slower growth as higher taxation, lower government spending, and a growing retiree population pressures GDP. Spikes in volatility in May and June impacted equities, currencies and, in a positive fashion, treasuries.
Over the quarter, the Fund lost 2%, compared to a 6% loss on the S&P/TSX Composite Index. Small-and mid-cap holdings were disproportionately impacted by the quarter’s volatility. The Fund only had minimal exposure to the telecom sector; a group that likely received fund flows from investors fleeing financials. The Fund also held no shares in gold mining companies, which were positive contributors to the TSX over the quarter.
The Fund continued to reflect its discipline of buying attractively-priced equity and debt securities and seeking mispricing between securities. To this end, the Fund accumulated positions in a global agribusiness and food company (Bunge Ltd.), a grain handling and marketing firm (Vitera Inc.), and a loyalty management services company (Groupe Aeroplan Inc.).
The Fund also used the volatility of May and June to buy back the units of Westshore Terminals Income Fund that were sold in the first quarter. Holdings in Yellow Pages Income Fund and Consumer Waterheaters Income Fund were sold, as both reached prices that fully reflected investor expectations.
The great debate about inflation versus deflation (or, maybe less dramatically, economic stagnation and economic growth) is readily seen in the equity market. In Canada, three moves of 7-8% occurred in the first six months of 2010. Perhaps the lack of direction from equities and a challenging macro environment have resulted in the continued flow of funds to fixed-income securities. Credit spreads are decent, reflecting falling default levels, but are generally demonstrating fair value for these bonds. Treasury securities in Canada at the end of the quarter reflected very low real returns. Unless we fall into a deflationary spiral, holders of these bonds will be very disappointed with their returns.
The Fund remains defensively positioned, as this recovery in asset markets and valuations still assumes that many things will succeed. This is a different type of “Goldilocks”, in that we can’t afford “too hot” or “too cold”. Having said this, there are and will continue to be opportunities in which the Fund can capitalize in order to deliver sound, risk-adjusted returns to investors.
Eric Dzuba