Quarterly Report
Second Quarter 2010
Small cap stocks gave up their gains for the year during the second quarter of 2010. Concerns over European sovereign risk, the moderation of the Chinese economy and muted US economic growth prospects have placed pressure on the equity markets. Despite these economic challenges, commodity prices in copper, oil and gold continue to be strong and have allowed the Canadian stock market to outperform their global counterparts. The Sceptre Equity Growth Fund returned –6.1% for the quarter, modestly lower than the S&P/TSX Small Cap Index. We are constructive on the long term outlook for the equity markets and continue to add attractively valued companies with solid growth prospects to our portfolio.
Three outstanding gold companies were key contributors to our performance in the quarter. Semafo (+42%) is a well managed gold company with solid assets in West Africa. San Gold (+44%) is a developing gold company in Manitoba. Finally, Alamos Gold (+21%) is a volumetric growth story with assets in Mexico and Turkey. It is expected to generate strong volumetric growth and grow gold production from 175,000 oz today to 350,000 oz by 2013. Finally, The Fund’s largest positions within the energy and technology sectors also contributed strongly to second quarter performance, led by Celtic Exploration (+13%) and MacDonald Dettwiler (+16%).
Detractors for the quarter included stock selection in the Industrial sector. Although the following companies are leaders in their area, their earnings outlook was not as positive as expected. Toromont (-22%), Transat (-24%) and Aecon (-23%) all had challenging financial results.
We continue to see very good investment opportunities in the small cap universe. New purchases in the quarter included Angle Energy, a growth oil and gas producer in Alberta. This company has amongst the lowest operating costs in the industry. Production is also very strong and is expected to double in the next 3 years. We also added Fortress Paper, a leader in currency printing with excellent prospects for market share gains. Management is outstanding and the company generates a 20% return on equity and offers strong earnings growth. Both companies have entrepreneurial management and operate in desirable industries. The Fund has 78 holdings and remains broadly diversified across sectors.
Third party analytics demonstrate that the Fund continues to offer a better profit outlook and much lower valuations (16x 2010 earnings vs. 21x for TSX Small Cap Index). This is achieved with lower debt levels and higher reinvestment rates than the overall market. While we expect continued volatility in 2010, we are confident that we can maintain strong relative outperformance given the Fund’s characteristics. Our focus continues to be finding companies with excellent management, strong growth and high return on equity.
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