NexC June Commentary

 Market Backdrop

June saw an escalation of Quantative Easing (“QE”) tapering worries as interest rate sensitive sectors sold off across the portfolio. This negative sentiment was driven by the U.S. Fed’s comments signaling a potential decrease to bond purchases in September with the market perceiving this as a precursor to an eventual hike in rates. The Canadian dollar also declined to the 0.95 level with economists forecasting a further decline to the 0.90 level vs. the U.S. dollar by 2014 primarily driven by general U.S. dollar strength and slower global growth.

In China, the PBOC initiated a policy to stem shadow banking in the region which caused interbank lending rates to shoot up 13.4% and the Shanghai Stock Exchange Composite Index fell over 10% on the same day. This caused a pullback in European and North American markets attributed to global risk aversion to a Chinese hard landing stemming from a deleveraging of their financial sector.Despite the pullback in markets this month, the expectations are for continued improvement across U.S. economic data. With the Fed policies inclined to be supportive for U.S. stock prices, the Fed will only initiate a reduction in QE if there is substantial improvement in core economic data like payrolls, manufacturing and unemployment.

Fund Commentary

This month saw a decline in NAV driven by a selloff in interest sensitive equities combined with a declining Canadian dollar. The leading sectors were Consumer Discretionary, Technology and Consumer Staples with an average performance of 3.09%, while our lagging sectors were Telecom, Energy, Financials, REITs and Utilities. The Fund had no exposure to the Materials sector and avoided any setbacks from the rapid decline in Gold and Silver in June.

The best stock in the Consumer Discretionary sector was Shaw Communications which saw upgrades from analysts. Their business remains isolated from a possible Verizon entry into the Canadian telecom space and our position gained close to 10%. The Fund also saw continued upside from Information Technology exposure gains of 4.81% in CA Inc. and 5.35% in Western Union.

The Canadian telecom sector also saw the emergence of a credible disruptive new entrant in the form of a Verizon bid for WIND, and possibly Mobilicity, which would give them access to 10% of the Canadian wireless market. The news generated immediate speculative selling on the incumbent Canadian wireless carriers (Telus, Rogers and BCE). This negative sentiment was further solidified by analyst downgrades resulting in a loss on the Fund’s positions of BCE (-6.46%), Rogers Communications (-11.71%) and Telus (-14.40%). The worst performing stock in the portfolio was Bonavista Energy, which sold off due to its Natural Gas exposure, generating a loss of 15.99% on the Fund’s position.

The Fund declared a $0.125 dividend which was paid on July 2 to shareholders of record at the close of business on June 28, 2013. The Fund will continue its covered call overwriting program on 22 U.S. equities. The Fund decreased its FX forward hedges to cover about 65% of the USD exposure as there is continued downward pressure on CAD into 2014. The Fund continues not to use any leverage for management of the NexC portfolio.

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