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
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
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
Equity markets around the world had a difficult quarter, brought on by the European sovereign debt crisis. As well, China’s economic growth expectations were somewhat reduced, impacting commodity prices. In this uncertain environment, global investors flocked to the safe haven of gold bullion. The S&P/TSX Composite Index declined 5.5% in the second quarter, with defensive sectors such as Telecommunications, Consumer and Health Care outperforming more cyclical sectors such as Energy and Financial Services. Gold stocks in particular, did very well in the quarter. Like most diversified funds, the Fund was underexposed to this top performing sub-sector. Over the same period, the Fund declined 6.1%. On a longer term basis, the Fund has outperformed the Index on a 10 year basis.
Not surprisingly, the two stocks that had the most positive impact on performance in the quarter were gold stocks: Goldcorp (+23%) and Franco-Nevada (+20%). Other winners included Pacific Rubiales (+21%) and Silver Wheaton (+34%). Our overweight in railroads also contributed to relative outperformance. Detractors in the quarter, aside from our gold underweight, included Materials stocks Potash Corp (-24%) and Teck (-29%) as fears of a slower economy overwhelmed their improving fundamentals. Our overweight in Financials – a positive in the first quarter – hurt us in the second quarter. Manulife (-22%) and Power Corp (-16%) fell as interest rate expectations were adjusted downward. Lastly, Royal Bank (-14%) reported a quarter that was below expectations and thus underperformed.
During the quarter, we made select changes to the portfolio. In the Consumer sector we initiated a position in Saputo Inc., one of the leading cheese producers in North America. Saputo trades at a reasonable valuation and has an excellent track record of growth and high returns. We also initiated a position in Tim Horton’s this quarter. To fund these purchases we eliminated our holding in Canadian Tire. In the Materials sector, we increased our precious metals weight by adding to growth names Agnico-Eagle and Silver Wheaton, while selling out small positions in Kinross and Inmet. In the Energy sector, we trimmed Canadian Oil Sands Trust and purchased Vermilion Energy Trust. Vermilion is a diversified global energy company with assets in Western Europe, Australia and Canada. It has an excellent management team, conservative capital structure and a handsome yield. We continue to seek quality investments that have long term growth and trade at reasonable valuations.
Sceptre Global Equity Fund
