NexC May Commentary

 Market Backdrop

The story of the month was the sudden decline in U.S. bond prices, which consequently carried over to U.S. equities. The pullback was in response to the Fed signal of a plan to end bond buying, pointing towards a “tapering” of quantitative easing within the year. Our view is that the case for high quality dividend paying equities remains intact.

More broadly, weaker growth in China and a stronger U.S. dollar provided headwinds for commodity prices. Emerging market currencies and rates were particularly susceptible to this mix of poor macro fundamentals, and experienced a violent sell off during the month. The Nikkei peaked at an increase of 40% on the year, before correcting sharply in a bout of risk aversion. We attribute the selloff to anxiety over higher rates coupled with seasonal profit-taking in May. Our expectations are continued improvement across U.S. economic data, with the Fed policies inclined to be supportive for U.S. stock prices.

Fund Commentary

This month the Fund saw an appreciation in NAV. The leading sectors were Health Care, Industrials and Information Technology, where the Fund had an average performance of 18.31% across the sectors. The Fund’s best performing stock in Health Care was Bristol Meyers-Squib, up 17.5% on price target upgrades and analyst rating increases on the continued success of its PD-1 cancer therapy program. The Fund also holds Merck, which along with Bristol Meyers, is a leader in the PD-1 therapy space. In the Industrials sector, Raytheon was the Fund’s best performing holding, up 10% on new military contracts from the U.S. government. There continues to be upside in the Information Technology sector with SAIC Inc. being the Fund’s top holding returning 3.75%.

The lagging sectors causing a drag on the Fund’s performance were Utilities, Financials, REITs and Telecommunications, where the Fund’s investments were down an average of 9.74%. The stocks the Fund owns in the Utilities sector saw almost an 8.4% average decline and our Financials investments declined 1.3%. The decline was attributed to headwinds in the high yield equities sector driven by a decline in bond prices which carried over to equities with a sector wide selloff from its May 21 peak. The Fund’s strategy to diversify across sectors helped protect the portfolio from the Utilities sector headwinds. Calloway REIT and CIBC were the Fund’s worst performing REIT and Financial holdings, down 6.54% and 1.54% respectively. American Electric Power and First Energy were the worst performing Utilities holdings, down 10.13% and 15.32% respectively. Rogers Communications was the Fund’s worst performing Telecommunications holding, declining 5.4% over the month, attributed to regulatory risk from Industry Canada’s policy update on spectrum and airwave license sales.

The Fund’s quarterly rebalance occured in May, rotating out of 11 equities to hold higher yielding names in Energy, Financials, Utilities and REITs that meet the quality criteria. Specifically, the Fund added Cenovus Energy, CIBC, Bonavista Energy, Emera, Pembina Pipeline, Cominar Real Estate Investment Trust, RioCan Real Estate Investment Trust, Suncor Energy in Canada, and Lounor Exploration, Philip Morris, and Great Plains Energy in the U.S. The Fund sold holdings in Enbridge, Baytex Energy, TransCanada, National Bank, Potash, Dundee Real Estate Trust and Can Real Estate Trust in Canada, and Kraft, Cablevision, SAIC, Darden Resturants in the U.S. The Fund continued its partial covered call overwriting program on 22 U.S. equities. FX forward hedges cover about 80% of the USD exposure. The Fund is currently not using leverage.

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