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
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
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.
Sceptre Canadian Equity Fund
Sceptre Global Equity Fund
