Fund Manager
Eric Dzuba
October was a difficult month for the fund. Key issues included a private company write-down, weakness in the REIT space and two small cap income trusts experienced negative price swings despite significant intrinsic value or decent fundamentals.
The private company that was written down operates in the energy space in Western Canada. The province of Alberta announced details of its new royalty scheme at the end of the month: a move that was one more negative piece of news for a sector that has suffered this year from weak natural gas prices and a high Canadian dollar.
Weakness in the REIT space continued on increased credit spreads and concerns of economic slowing in North America. Although we fared better than the Canadian REIT index (it was down over 4%, we were -2% on REIT selection and shorting index heavyweights), it's still been difficult as the market ignores some decent fundamentals. For example., Brookfield Properties reported that expiring leases are being renewed at +30% higher rates, while same store operating income for the quarter is up 7% over same quarter last year.
Two small cap trusts also contributed to the weak returns. A trust which operates a leasing and finance business has been impacted by the slowing US economy and the bumpy credit market. Our credit work and conversations with management show that their existing lease book is generally strong. Their business is slowing as competitors lower their credit standards in order to gain market share. This situation will correct itself over time, but the value of the trust is in its existing lease book: all things being equal, the trust could be worth 40% more than where it traded at the end of the month. Another small cap trust has been negatively impacted by the rising Canadian dollar. Again, the market is not seeing the strong fundamentals of this pulp chemical trust: its third quarter report beat street cash flow estimates by about 70%. We can't ignore the dollar's impact, but the market just doesn't care about operations right now.
Eric Dzuba
Associate Portfolio Manager
Front Street Long/Short Income Fund
Front Street Long/Short Income Fund Ltd.
Date Published
Related Fund(s)
Fund Manager
October was a difficult month for the fund. Key issues included a private company write-down, weakness in the REIT space and two small cap income trusts experienced negative price swings despite significant intrinsic value or decent fundamentals.
The private company that was written down operates in the energy space in Western Canada. The province of Alberta announced details of its new royalty scheme at the end of the month: a move that was one more negative piece of news for a sector that has suffered this year from weak natural gas prices and a high Canadian dollar.
Weakness in the REIT space continued on increased credit spreads and concerns of economic slowing in North America. Although we fared better than the Canadian REIT index (it was down over 4%, we were -2% on REIT selection and shorting index heavyweights), it's still been difficult as the market ignores some decent fundamentals. For example., Brookfield Properties reported that expiring leases are being renewed at +30% higher rates, while same store operating income for the quarter is up 7% over same quarter last year.
Two small cap trusts also contributed to the weak returns. A trust which operates a leasing and finance business has been impacted by the slowing US economy and the bumpy credit market. Our credit work and conversations with management show that their existing lease book is generally strong. Their business is slowing as competitors lower their credit standards in order to gain market share. This situation will correct itself over time, but the value of the trust is in its existing lease book: all things being equal, the trust could be worth 40% more than where it traded at the end of the month. Another small cap trust has been negatively impacted by the rising Canadian dollar. Again, the market is not seeing the strong fundamentals of this pulp chemical trust: its third quarter report beat street cash flow estimates by about 70%. We can't ignore the dollar's impact, but the market just doesn't care about operations right now.
Eric Dzuba
Associate Portfolio Manager
Front Street Long/Short Income Fund