Fund Manager
Eric Dzuba
S&P/TSX fell 23.5 % in the quarter, bringing the loss to just over 35% for the year. This quarterly return is only second to Q3 1998 as the worst quarter since 1970. The annual return was the worst over that time period. What made the quarter, and the last half of 2008, extremely frustrating for investors was the rapid way in which equity differentiation vanished: large cap and small cap, value and growth stocks were all pounded. In 2008, 91% of stocks in the TSX were down. With the exception of treasury notes and bonds, there were few places to hide.
The fund lost 8.7 % over the year, with 6.8% coming from the fourth quarter. Merger arb positions helped mitigate some of the losses in the fund; although a loss was taken on the failed BCE Inc. privatization, money was made on successful deals such as Tanganyika Oil Company Ltd., First Calgary Petroleums Ltd., Anheuser Busch Cos Inc., Connors Brothers Income Fund and National City Corp. Relative outperformance can also be attributed to minimal exposure in the materials and energy sectors over the quarter, as well as hedges against convertible debenture positions.
In addition to watching plunging asset values, all eyes were on the nature and size of government support plans, globally, as schemes were introduced to restart lending after the failure of Lehman Brothers in early September. The acronyms flowed as programs to manage troubled assets and / or to encourage bank lending were debated and legislated. With administered rates in the United States effectively at zero, other measures will be required to pursue an expansionary monetary policy: namely, purchasing assets from banks in one form or another in order to encourage lending activity (assets would be swapped for cash, yielding nothing).
In terms of freeing up liquidity, the measures appeared to be working by the end of the year, as swap spreads and LIBOR rates had come in considerably from levels experienced in the fall. Commercial paper issuance in the United States also began to normalize, while mortgage rates also came down noticeably.
As the New Year begins, we are looking out to economic news that is sure to disappoint, at best. Despite this economic storm, the line spoken in the introduction to Shakespeare’s Macbeth – “what’s foul is fair and fair is foul” – seem all the more appropriate in the asset markets. “Safe” treasuries are yielding nothing or have negative real returns, while investment grade corporate bonds are yielding equity-like returns. High-yield bonds are priced for a 1930’s style depression and equities are the new toxic asset class. If one believes that fiscal and monetary global stimulus in the trillions will keep us out of a deflationary spiral, then taking a chance on earning a positive real return with the “foul” assets looks much more appealing than what the “fair” asset class has to offer.
Q4 2008 Commentary
Date Published
Related Fund(s)
Fund Manager
S&P/TSX fell 23.5 % in the quarter, bringing the loss to just over 35% for the year. This quarterly return is only second to Q3 1998 as the worst quarter since 1970. The annual return was the worst over that time period. What made the quarter, and the last half of 2008, extremely frustrating for investors was the rapid way in which equity differentiation vanished: large cap and small cap, value and growth stocks were all pounded. In 2008, 91% of stocks in the TSX were down. With the exception of treasury notes and bonds, there were few places to hide.
The fund lost 8.7 % over the year, with 6.8% coming from the fourth quarter. Merger arb positions helped mitigate some of the losses in the fund; although a loss was taken on the failed BCE Inc. privatization, money was made on successful deals such as Tanganyika Oil Company Ltd., First Calgary Petroleums Ltd., Anheuser Busch Cos Inc., Connors Brothers Income Fund and National City Corp. Relative outperformance can also be attributed to minimal exposure in the materials and energy sectors over the quarter, as well as hedges against convertible debenture positions.
In addition to watching plunging asset values, all eyes were on the nature and size of government support plans, globally, as schemes were introduced to restart lending after the failure of Lehman Brothers in early September. The acronyms flowed as programs to manage troubled assets and / or to encourage bank lending were debated and legislated. With administered rates in the United States effectively at zero, other measures will be required to pursue an expansionary monetary policy: namely, purchasing assets from banks in one form or another in order to encourage lending activity (assets would be swapped for cash, yielding nothing).
In terms of freeing up liquidity, the measures appeared to be working by the end of the year, as swap spreads and LIBOR rates had come in considerably from levels experienced in the fall. Commercial paper issuance in the United States also began to normalize, while mortgage rates also came down noticeably.
As the New Year begins, we are looking out to economic news that is sure to disappoint, at best. Despite this economic storm, the line spoken in the introduction to Shakespeare’s Macbeth – “what’s foul is fair and fair is foul” – seem all the more appropriate in the asset markets. “Safe” treasuries are yielding nothing or have negative real returns, while investment grade corporate bonds are yielding equity-like returns. High-yield bonds are priced for a 1930’s style depression and equities are the new toxic asset class. If one believes that fiscal and monetary global stimulus in the trillions will keep us out of a deflationary spiral, then taking a chance on earning a positive real return with the “foul” assets looks much more appealing than what the “fair” asset class has to offer.