NexC July Commentary

 Market Backdrop

July was a good month for equities, with the S&P 500 Index up 5.5% and the S&P/TSX 60 Index up 3.02%. Investors returned to high growth and high yield equities as central banks calmed any perceptions of immediate rate increases. Bernanke restated the need for “highly accommodative monetary policy” for the foreseeable future. The projections are for range bound rates, which should produce continued upside in U.S. equities. The U.S. dollar reached a YTD closing price high versus the Canadian dollar at 1.0582, before ending the month at 1.0277.

Despite the uncertainty surrounding Quantitative Easing tapering by the Fed, our expectations are for range-bound rates supported by accommodative central bank policies. The NexC portfolio is positioned to benefit from low interest rates, improving U.S. fundamentals, and an improving economy with better ISM manufacturing, payrolls, consumer confidence and employment numbers. Diversification into technology and industrials should also benefit the Fund from general strengthening in the U.S. economy.

Fund Commentary

July saw an increase in NAV primarily driven by an uptick in U.S. equities and M&A activity in the Canadian retail sector. Loblaw Co. bid $62.34 per share to acquire Shoppers Drug Mart, representing a 30% premium over the stock’s trading price. Shoppers Drug Mart was the largest holding in the portfolio and saw a 26% increase in value, making it the best performing stock in the portfolio. The deal is expected to close in September, with limited regulatory hurdles.

The leading sectors in U.S. positions were industrials, utilities and technology, with names in those sectors up 9.13%, 2.41% and 1.23% respectively. The Fund’s top performing U.S. position was Sonoco Products up 11.34% after strong earnings and continued growth forecasts. In the Industrials sector, Raytheon and Lockheed Martin were up 9.6% and 8.7% respectively, driven by dividends and outperformance of the stocks due to increased defense spending globally. In Canada, the leading sectors were consumer staples and financials, up 26% and 5.53% respectively. The Fund’s next best performing stock after Shoppers Drug Mart was IGM Financial, with the Fund’s position up 8.25% for the month, driven by strong fundamental performance from the company with growth in AUM in its mutual fund and Mackenzie Financial businesses plus proportional earnings from its stake in Great West Life.

The Fund’s lagging sectors were health care and consumer staples in the U.S., and telecom and real estate in Canada. The worst performing stock in the portfolio was Bonavista Energy, as it was down ~5.15% in July and 13% YTD. The company is positioned as one of the lowest cost natural gas producers with growing oil and liquids production. Although they are fundamentally sound and are achieving cash flow objectives, the stock has sold off due to weak natural gas prices. The Canadian REIT sector continues to underperform due to general weakness in Canadian high yield stocks, and bearish views on the Canadian real estate sector.

The Fund rebalanced its call overwriting program this month; the Fund was called away on 8 of 22 options, and overwrote new call options on 18 Canadian and U.S. equities, expiring in August. The Fund hedged most of its currency exposure, but the approximately 15% residual unhedged position benefited from the strength in the U.S. dollar. The Fund has not employed leverage.

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