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
Sceptre High Income Fund
Sceptre Income & Growth Fund
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
The market pulled back strongly in the second quarter on concerns about the strength and duration of the global economic recovery. Governments have started to slow and reverse fiscal and monetary stimulus. Europe is struggling under the burden of heavy deficits and massive indebtedness. One of the main engines of global growth, China, is attempting to slow the pace of their growth in the face of rising inflationary pressures. With the slowdown of government participation in the global economy, the market is concerned about the ability of corporations and consumers to perpetuate the current recovery.
In second quarter, the Global Mutual Fund underperformed its benchmark. The Fund returned -10.2% vs. -8.3% for the MSCI World Index. Consumer Discretionary and Telecommunications sectors had the strongest relative performance. Energy, Health Care, and Consumer Staples had the weakest relative performance. From a stock perspective, the largest positive contributors were Goldcorp (+23%), Yum! Brands (+7%), and CSX (+3%). Anadarko Petroleum (-48%), Teck Resources (-24%), and CVS Caremark (-16%) were the biggest detractors to performance.
During the quarter, emerging market exposure was increased through the addition of British American Tobacco, a tobacco company with more than half of its sales from emerging markets, and Rio Tinto, a large mining company with significant exposure to key commodities demanded by emerging countries to strengthen their infrastructure. We also decreased our exposure to European financials with the sale of BBVA and National Bank of Greece.
Markets have dropped strongly in anticipation of a slowdown in the earnings recovery resulting in a rapid contraction in market valuation. Earnings trends have indeed flattened out. We remain cautious on global equities on concerns of a weak recovery and the potential for financial contagion leading to another global crisis. With the weak performance of global markets, valuations for many sectors and companies are somewhat attractive although we remain concerned that expectations for the duration and magnitude of the global recovery are too high.
The emerging Asian economies have been much more resilient than the Western economies and we continue to expect them to lead global GDP growth. We expect that the U.S. and Europe will continue their recovery but we think the GDP growth rates of these two regions will remain slow relative to the emerging world.
We remain relatively neutral by sector with modest underweights in Utilities, Financials and Materials and modest overweights in Health Care, Consumer Staples, and Industrials. On a regional basis, we remain underweight Europe (including UK) and Asia (including Japan), with overweight positions in emerging markets and North America.
