Canadian Equity Pool Quarterly Review
For the period ending
December 31, 2009
PERFORMANCE REVIEW
The Canadian equity market, as measured by the S&P/TSX Composite Index, continued its strong performance in 2009 with a 3.9% return in the final quarter, to end the year up 35.1%. This compares to 2008’s performance of -33.0%.
In the quarter, most sectors produced solid returns with the important exception being Financials which declined 0.7% as banks were approximately flat while the insurance subsector declined 7.4%.
During the quarter the portfolio returned 3.5% lagging the index return of 3.9%. Two decisions contributed to this shortfall – our overweight to the Financial sector and our lack of exposure to the Utilities and Pipelines. In combination, these two groups returned approximately 13%, as investors sought their attractive dividends.
Security selection was positive in all but one sector as a number of holdings performed extremely well. These included Potash, which was up 17.9%, Bankers Petroleum (+31.5%), Teck Resources (+24.8%) and Alliance Grain Traders (+53.7%).
Detracting from performance was Manulife which, after recovering strongly from its lows in March, shed 13.5% due to uncertainties about its strategic direction and an unexpected equity issue that diluted existing shareholders.
REVIEW AND STRATEGY
In the fourth quarter, the Fund continued to modestly increase Canadian equities. Significant purchases included a new holding of Finning International as well as additions to Suncor Energy and Teck Resources. We also topped up some of our other holdings including CNRail, EnCana and Manulife and increased our holdings of units of the Small Cap Pooled Fund. Finning is the distributor in Western Canada, South America and the UK of Caterpillar equipment. The company is expected to record solid earnings growth as the global economy picks up steam. Suncor is successfully integrating its operations with PetroCanada. The company has an attractive growth profile and is a low cost operator. Teck Resources, after raising new capital, has improved its balance sheet and the company should benefit from a stronger outlook for metallurgical coal and copper.
The Fund has reduced its exposure to banks by trimming Bank of Nova Scotia, CIBC and Royal Bank. While we still like the banks, valuations were getting extended and we wanted to reduce our overweight position. We reduced BCE and eliminated Telus. The wireline business has limited growth potential while wireless operations are becoming increasingly competitive. We sold shares of Husky Energy due to its relatively poor production growth profile and possible execution risk associated with its oil sands expansion.
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