Fund Manager
Eric Dzuba
Equity markets rose again this quarter, capping an end to 2009 that saw asset values climb significantly, prodded forward by accommodative monetary policy and a host of other government measures intended to stave off a depression. In a year where 20 and 30 per cent returns were not uncommon, we note how sentiment has changed significantly in 12 months.
Last year’s Q4 report closed with Macbeth’s foul is fair, referring to “safe” bonds versus “risky” equities. The speed at which the equity market bounced from February/March levels of this year has admittedly been a surprise. It’s worth noting that the bulk of this year’s gains were limited to the second and third quarters: in Q4 the S&P TSX only returned 3 per cent. Investors are now waiting to see if this recovery can stand on its own.
The Diversified Income Fund returned 4.3 per cent in Q4, despite a significant cash position. A diverse number of holdings contributed to this performance, including: natural gas trust Peyto Energy Trust; Davis & Henderson Income Fund (classified as a Financial company); technology company Research in Motion; renewable power generator Algonquin Power & Utilities and coal companies Westshore Terminals Income Fund and Western Coal Corp. Gains in the fixed-income holdings were generally modest over the quarter. One notable exception was a significant gain on a convertible debenture of Harvest Energy Trust, the result of the acquisition of the Trust by the Korean National Oil Corporation, this fall. The fund remains defensively positioned as this recovery in asset markets has been very aggressive.
Canadian equity markets are becoming stretched, with the S&P/TSX trading at about 21 times earnings, and investors are becoming very optimistic about earnings growth. Valuations have generally arrived at a point where too many things have to go right: China cannot tighten its monetary policy significantly, unemployment cannot become worse in North America (yet neither can it improve too rapidly), a second wave of mortgage defaults cannot ensue in the United Sates: these are just some of the issues forming the “tightrope” upon which the markets are balancing at the beginning of this new decade.
In our commentary from the first quarter of 2009, we concluded with some musings about the possible risks from governments and their agencies that could take the opportunity, to paraphrase White House
Chief of Staff Rahm Emanuel, to “not let this crisis go to waste”. Admittedly, a continued rise in asset values would likely diminish the political will to push change forward. But we have seen proposals by the likes of the U.K. Financial Series Authority to charge a tax on financial transactions (indeed the U.K. did pass a surtax on bankers’ bonuses in excess of £25,000), while the U.S. Commodity Futures Trading Commission is looking into rule changes to limit the size of positions in the energy derivatives market. With a public generally hostile to capital-market participants and governments in desperate need to generate tax revenue, the “unknown unknowns” that disrupt capital markets could come in the form of regulation and taxes.
Eric Dzuba
Eric Dzuba - Q4 2009 Commentary
Date Published
Related Fund(s)
Fund Manager
Equity markets rose again this quarter, capping an end to 2009 that saw asset values climb significantly, prodded forward by accommodative monetary policy and a host of other government measures intended to stave off a depression. In a year where 20 and 30 per cent returns were not uncommon, we note how sentiment has changed significantly in 12 months.
Last year’s Q4 report closed with Macbeth’s foul is fair, referring to “safe” bonds versus “risky” equities. The speed at which the equity market bounced from February/March levels of this year has admittedly been a surprise. It’s worth noting that the bulk of this year’s gains were limited to the second and third quarters: in Q4 the S&P TSX only returned 3 per cent. Investors are now waiting to see if this recovery can stand on its own.
The Diversified Income Fund returned 4.3 per cent in Q4, despite a significant cash position. A diverse number of holdings contributed to this performance, including: natural gas trust Peyto Energy Trust; Davis & Henderson Income Fund (classified as a Financial company); technology company Research in Motion; renewable power generator Algonquin Power & Utilities and coal companies Westshore Terminals Income Fund and Western Coal Corp. Gains in the fixed-income holdings were generally modest over the quarter. One notable exception was a significant gain on a convertible debenture of Harvest Energy Trust, the result of the acquisition of the Trust by the Korean National Oil Corporation, this fall. The fund remains defensively positioned as this recovery in asset markets has been very aggressive.
Canadian equity markets are becoming stretched, with the S&P/TSX trading at about 21 times earnings, and investors are becoming very optimistic about earnings growth. Valuations have generally arrived at a point where too many things have to go right: China cannot tighten its monetary policy significantly, unemployment cannot become worse in North America (yet neither can it improve too rapidly), a second wave of mortgage defaults cannot ensue in the United Sates: these are just some of the issues forming the “tightrope” upon which the markets are balancing at the beginning of this new decade.
In our commentary from the first quarter of 2009, we concluded with some musings about the possible risks from governments and their agencies that could take the opportunity, to paraphrase White House
Chief of Staff Rahm Emanuel, to “not let this crisis go to waste”. Admittedly, a continued rise in asset values would likely diminish the political will to push change forward. But we have seen proposals by the likes of the U.K. Financial Series Authority to charge a tax on financial transactions (indeed the U.K. did pass a surtax on bankers’ bonuses in excess of £25,000), while the U.S. Commodity Futures Trading Commission is looking into rule changes to limit the size of positions in the energy derivatives market. With a public generally hostile to capital-market participants and governments in desperate need to generate tax revenue, the “unknown unknowns” that disrupt capital markets could come in the form of regulation and taxes.
Eric Dzuba