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
Sceptre Equity Growth Fund
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.
