NexC August Commentary

 Market Backdrop

Markets saw a pickup in volatility in August with most major equity markets finishing down on the month. The main catalysts driving risk aversion were escalating tensions in Syria and concerns over tapering of the Fed’s quantitative easing program going into September. Uncertainty surrounded the scale of potential tapering, as fundamental economic data which is a key input into the Fed’s decision making was mixed in August. Global manufacturing data came in above expectations, US employment numbers were slightly disappointing and consumer confidence indicators were mixed. Going forward, all eyes are on the Sept 18 FOMC meeting for an indication of the Fed’s next move.

In the commodities space, crude oil rallied 6% and gold recovered to $1400 with the tensions in Syria encouraging buying . The agriculture sector saw increased short interest in anticipation of a record harvest, however a downward revision to crop yields and poor weather caused choppy price action across grains.

The S&P/TSX 60 Index was up 1.394% in August outperforming most global indices, as Canadian equities benefitted from strong inflows into the resource sectors. The S&P 500 finished down 2.90% in U.S. dollar terms during the month. The U.S. dollar saw strong performance this month, rising from a low of 1.0277 to 1.0537.

Fund Commentary

August was an eventful month for both U.S. and Canadian equities. The Fund’s NAV declined as we saw the value of the Fund’s equities decline due to continued pressure on yield names. The Fund rebalanced its equity portfolio this month with a turnover of 11 names and increased exposure to Canadian names by 10%. The Fund took profits in names like Shoppers Drug Mart, CA Inc., Raytheon and Western Union, and added higher yield stocks with attractive valuations. The Fund found attractively valued Canadian names, primarily across banks, as they were trading lower due to concerns around their exposure to an overheated Canadian real estate market. The new additions to the Fund include Agrium, ARC Resources, Bank of Nova Scotia, Canadian Oil Sands, Dundee REIT, Keyera Corp, Potash Corp, Royal Bank of Canada, TransAlta Corp, Toronto Dominion Bank in Canada and The Southern Company in the United States. The Fund sold its positions in Altagas, BCE, Bonavista Energy, CA Inc, FirstEnergy Corp, IGM Financial, Raytheon Co., Shoppers Drug Mart, Sun Life Inc, Sonoco Products and Western Union.

The leading sectors in the month were Energy, Industrials and Consumer Discretionary. The top performers were Suncor Energy, CIBC, Keyera Corp and Bank of Montreal. The Fund’s position in Suncor gained 9.28% as the stock traded higher on a Berkshire Hathaway investment in mid-August. The stock traded up 8% on the news. Keyera Corp had blowout Q2 2013 earnings on August 8, with a 20% increase in earnings over Q2 2012 which led us to add it to the portfolio on August 27. The position gained 4.4% by the end of the month. CIBC and BMO also had Q3 2013 earnings well above expectations, which saw their stocks appreciate.

The lagging sectors were Utilities, Consumer Staples and Real Estate. The bottom performers were Great Plains Energy, Emera Inc., Cominar REIT and American Electric Power. The lagging performance in Great Plains, Emera and Cominar were attributed to broad selloffs in yield names, which affected the Utilities and REIT stocks in the portfolio.

The Fund did not write calls on the portfolio after the August expiration, and will revisit the overwriting strategy in mid September. The Fund has hedged over 90% of its USD currency exposure, but the residual position benefited from outperformance in the USD for the month. The Fund has not used leverage for management of its portfolio.

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