Fund Manager
Eric Dzuba
This September was among the worst for Canadian equities in the last ten years. The S&P/TSX Composite Index fell 14.6%, as energy and materials stocks came under pressure as the U.S. credit crisis became global and companies outside of financial services began to face the reality of a significant slowdown in the global economy. As we wrote in our second quarter report, the discrepancy between the Canadian equity market and those of other developed markets had to close: as it turned out, our market dropped to fall in line with others.
The end of the decoupling theory – where emerging economies were thought to be insulated from the vagaries of developed economies – came about for now as financial institutions in the U.S. and Europe failed (or “required to be rescued”), buried under piles of bad loans and a crisis of confidence in the Interbank loan market. Credit began tightening up as banks curtailed lending to both each other and to businesses. The very crowded long commodity/short financials trade began its brutal unwind as commodity prices began declining sharply late in the summer. Economic indicators began to point to slowing growth, and central banks and governments the world over began to take measures to support the global banking system.
As we wrote in June of this year, we began reducing energy and materials positions as prices for equities began reflecting overly-robust commodity prices and investor exuberance. We continued selling through July and into August as well, generally keeping only the most defensive energy names in the portfolio. These securities include pipeline trusts and common stock, and energy trusts with the most defensive distributions. Utilities were also added for their dividends and defensive characteristics.
The Fund also benefited from a number of event-driven situations in August and September, which served to reduce the volatility of the Fund’s return and contribute positively to the Net Asset Value during a difficult quarter. Offers were made for Fund positions such as Fording Coal Trust and Teranet Income Fund, while we took active merger arbitrage positions (buying a security trading at a discount to an agreed upon merger or privitization price) in stocks such as CHC Helicopter, Rothmans and Saxon Financial.
At the end of the quarter, the fund held a significant amount of cash that should allow us to look for some bargains – both equity and fixed income – in the fourth quarter. While we are not certain as to how deep and prolonged an economic recession might be and what volatility lies ahead as a result of continued de-leveraging, there are a few points that should be recalled. First, the yield on the S&P/TSX is now almost the same as that of 10-year government bonds. This situation has not been seen since the 1950s. Although equities are good value relative to government bonds, we believe that there could be a prolonged period of sideways movement in the stock market as a recession plays itself out. With investors in the developed world getting closer to retirement, yielding investments will become much more significant in the coming years as investors will want to get “paid to wait”.
Eric Dzuba
Associate Portfolio Manager
ERIC DZUBA Q3 2008 COMMENTARY
Date Published
Related Fund(s)
Fund Manager
This September was among the worst for Canadian equities in the last ten years. The S&P/TSX Composite Index fell 14.6%, as energy and materials stocks came under pressure as the U.S. credit crisis became global and companies outside of financial services began to face the reality of a significant slowdown in the global economy. As we wrote in our second quarter report, the discrepancy between the Canadian equity market and those of other developed markets had to close: as it turned out, our market dropped to fall in line with others.
The end of the decoupling theory – where emerging economies were thought to be insulated from the vagaries of developed economies – came about for now as financial institutions in the U.S. and Europe failed (or “required to be rescued”), buried under piles of bad loans and a crisis of confidence in the Interbank loan market. Credit began tightening up as banks curtailed lending to both each other and to businesses. The very crowded long commodity/short financials trade began its brutal unwind as commodity prices began declining sharply late in the summer. Economic indicators began to point to slowing growth, and central banks and governments the world over began to take measures to support the global banking system.
As we wrote in June of this year, we began reducing energy and materials positions as prices for equities began reflecting overly-robust commodity prices and investor exuberance. We continued selling through July and into August as well, generally keeping only the most defensive energy names in the portfolio. These securities include pipeline trusts and common stock, and energy trusts with the most defensive distributions. Utilities were also added for their dividends and defensive characteristics.
The Fund also benefited from a number of event-driven situations in August and September, which served to reduce the volatility of the Fund’s return and contribute positively to the Net Asset Value during a difficult quarter. Offers were made for Fund positions such as Fording Coal Trust and Teranet Income Fund, while we took active merger arbitrage positions (buying a security trading at a discount to an agreed upon merger or privitization price) in stocks such as CHC Helicopter, Rothmans and Saxon Financial.
At the end of the quarter, the fund held a significant amount of cash that should allow us to look for some bargains – both equity and fixed income – in the fourth quarter. While we are not certain as to how deep and prolonged an economic recession might be and what volatility lies ahead as a result of continued de-leveraging, there are a few points that should be recalled. First, the yield on the S&P/TSX is now almost the same as that of 10-year government bonds. This situation has not been seen since the 1950s. Although equities are good value relative to government bonds, we believe that there could be a prolonged period of sideways movement in the stock market as a recession plays itself out. With investors in the developed world getting closer to retirement, yielding investments will become much more significant in the coming years as investors will want to get “paid to wait”.
Eric Dzuba
Associate Portfolio Manager