NexC March Commentary

 Market Backdrop

Across the globe, our outlook is for unprecedented central bank accommodation to continue, which we believe is supportive for high quality, income-oriented equities. Canadian equity markets fell on weakness across commodities and the financial sector.

US and Japanese equity markets outperformed, but in Europe concerns resurfaced after the imposition of a bailout tax on bank deposits in Cyprus. This potential precedent for addressing bank failures across the rest of Europe caused widespread anxiety and fears of capital flight, which dragged on European equity markets. Meanwhile, Chinese economic news had a negative impact on the emerging markets complex. Weaker manufacturing numbers and a pullback in liquidity, intended to curb rising property prices, both caused investors to pare risk. Despite these worries, the US market was resilient, and focused on positive economic data. A strong payrolls report, supportive manufacturing and housing numbers, and a rising GDP growth outlook all helped push the S&P to new highs. Japanese equity indices were the best global performers this month, as the BOJ continued to devalue the Yen, and heighten expectations for inflation. .

Fund Commentary

The NexC portfolio delivered solid returns in March. The most significant theme driving returns was the portfolio’s North American diversification. Our 18 US based names averaged over 6.6% returns for the month, significantly outpacing the S&P500’s 3.75% gain. Meanwhile our 22 Canadian names averaged flat returns against a backdrop of a falling Canadian equity market. In terms of sectors, our strongest performance came from Healthcare, Information Technology, and Consumer Discretionary, while Financials was our only losing sector. Our focus on sector diversification was important in limiting the drag from Financials.

Outsized single-name contributions were all on the positive side for the month. We saw strong gains from our exposure to defense contractors SAIC Inc. and Lockheed Martin, as the names were oversold on budget sequestration fears. Management at SAIC, in particular, gave a strong signal with the announcement of a special dividend which drove a 5% single-day rally. In the Consumer Discretionary sector, Darden Restaurants bounced back 11.7% as the market re-evaluated the firm’s strategy to address margin and earnings declines. Meanwhile, we saw double digit gains from drug maker Bristol-Myers Squibb and packaging firm Sonoco Products.

In March we initiated a modest covered call overwriting program on approximately 8.5% of our portfolio, corresponding to a portion of our investments in 12 names. We also maintained our FX forward hedge covering approximately 75% of our USD exposure. The fund’s credit facility remains undrawn as we are not currently using leverage.

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