Market & Fund Commentaries
| Every quarter, Sceptre investment management teams report on relevant markets, the activities within each mutual fund portfolio, and the outlook for the future. Expand the following list to view the commentary in which you are interested. Further in-depth fund information can also be viewed in the Mutual Fund area of the website. |
Second Quarter 2010
Sceptre Bond Fund
During the second quarter of 2010, the DEX Universe bond index returned 2.9%. The Fund’s underperformance of 60 basis points relative to the index for the second quarter is due entirely to an overweight position in corporate bonds. The duration of the portfolio was maintained fairly close to the index, except for two occasions, where the fund manager employed a tactical rates strategy to capitalize on a temporary rise in short term bond yields. This was affected by selling short-dated bonds and buying very short-dated bonds and floating rate notes. However, portfolio duration was returned close to the index by quarter end, with the outcome proving beneficial to performance.
Strong demand for yield and concern about the global economy during the second quarter of 2010 resulted in broad strength throughout the bond market. Corporate bonds underperformed the broader bond market as corporate credit yield spreads widened with weakness in equity markets, but this was partly mitigated by term structure and security selection.
Economic growth and inflation are in line with Bank of Canada forecasts reducing the need for rates at emergency levels. Despite the 25 basis points rate hike in June, the bond market has reduced expectations for an extensive hiking campaign, as the US Federal Reserve is unlikely to hike until 2011 and global macroeconomic recovery remains tentative. While long-term federal government bonds provided the best sub-sector return of 6.8%, the weakest sub-sector, short-term corporate bonds, managed to provide a positive return of 1.5%.
Currently, lower Government of Canada bond yields appear less compelling relative to our expectations for further Bank of Canada rate hikes over the next 12 months. Although our overweight position in corporate bonds negatively impacted performance in the second quarter of 2010 we have maintained this overweight in order to generate higher portfolio yield than the index.
Sceptre High Income Fund
The Sceptre High Income Fund outperformed the S&P/TSX Composite Index by 140 basis points in the second quarter of 2010, returning -4.1% compared to the S&P/TSX Composite Index which posted a return of -5.5%. The sectors which had positive returns for the Index during the quarter were Materials, Consumer Discretionary, Health Care and Telecommunications. The Materials sector was only marginally positive as the significant strength in the Gold and Precious Metals sub-sector offset the substantial weakness in the Metals and Mining sub-sector. The largest detractors to the Index were the Financials, Energy and Industrials sectors.
We stated in our last quarterly publication that we believe there is an appetite for yield stocks and, in particular, dividend growers. This is very much a secular theme as more and more investors are drawn to these types of investment vehicles given the recent volatility in equity markets and changing demographics. Interestingly, in the market decline during the second quarter, the S&P/TSX Capped Income Trust, Energy Income Trust and REIT Income Trust indices out-performed the broader market. Although, these sub-indices were not completely insulated from the market decline as both the Income Trust and Energy Trust sub-indexes had negative returns while the REIT Index actually had a +1.6% return.
Notable transactions during the quarter included initiating a position in Saputo Inc. which is a Consumer Staple name mainly involved in the global cheese and dairy market. We sold Shoppers Drug Mart given the regulatory headwinds the company is facing and the possibility of slower dividend growth in the years ahead. We also trimmed our position in Canadian Oil Sands to increase our weighting in Vermilion Energy which has a higher yield and better near term growth profile. We initiated a new position in Cenovus Energy which is another oil and gas company with some of the best oil sands assets in Canada and management that has indicated a commitment to growing the dividend over the long term. Finally, we added to our position in North West Company which we believe is well positioned for stable growth in the food retail sector, while reducing our Labrador Iron Ore Income Fund position.
Stocks that significantly outperformed during the quarter were Canadian Energy Services (+13.0%), Northland Power (+6.6%), North West Company (+6.4%) and BCE Inc. (+5.5%). Detractors from performance included Labrador Iron Ore Income Fund (-18.8%), Great West Life (-16.4%) and Royal Bank (-14.0%).
Despite the current market uncertainty and volatility, we will continue to hunt for yield-oriented opportunities that meet our investment criteria. Our criteria includes management teams with a strong record of execution, solid balance sheets for flexibility and a business model that lends itself to earnings and dividend growth.
Sceptre Income & Growth Fund
The global economic recovery started to falter in the second quarter of 2010 as many nations began to move away from massive stimulation of their economies and toward the implementation of austerity measures designed to reduce annual deficits and rising total indebtedness. Many investors, having become increasingly concerned about the future outlook for both the economy and financial markets, adopted a more risk-averse approach within their portfolios, turning to the safest assets and away from any security that might suffer in a second economic correction. In this environment, bonds outperformed equities and Government bonds outperformed corporate securities. The DEX Bond Index returned 2.9% while the Canadian equity market declined 5.5% and global equities were off 8.3%.
For the second quarter, the Fund returned -4.4% after fees. Both bond and equities underperformed their respective indices as corporate bonds, an area of the market that we are overweight, underperformed Government of Canada bonds. Equities were also weaker than the overall market as many economically-sensitive securities, particularly within the Financial and Resource sectors suffered major declines. In the case of Research in Motion (-30.5%), the company was hurt by Apple Computer’s new product introductions while Shoppers Drug Mart (-24.1%) was negatively impacted by proposed new government pricing criteria for generic drugs.
The structure of the portfolio changed modestly in the quarter as we deployed most of the Fund’s cash into Government of Canada bonds while at the same time reducing our exposure to provincial bonds. We remain overweight high quality corporate bonds which provide us with a higher yield than the overall market. The current asset mix of the Fund is 0.5% short-term investments, 38.0% bonds and 61.6% equities.
Within the equity component, new purchases included Saputo Inc, a Canadian dairy and cheese operation that has an excellent growth record, Methanex, which is benefiting from China’s increased appetite for methanol and Vermillion Energy Trust, a highly successful Canadian international energy producer. We also eliminated or reduced a number of resource-oriented holdings.
In the current weaker economic environment, the risk of a second downturn is more pronounced. Consequently, we are taking a cautious approach to our investing.
Sceptre Equity Growth Fund
Sceptre Canadian Equity Fund
Sceptre Global Equity Fund
