NexC October Commentary

Market Commentary

Markets covered wide ranges in October, driven by a high level of activity from central banks globally. Investors have been seeking yield after the September FOMC announcement when the Federal Reserve did not begin tapering their bond purchasing program. The primary events in October which drove equity markets were the appointment of Janet Yellen as Ben Bernanke’s successor, the government shutdown, and the potential of the U.S. defaulting on its debt. All these events were resolved, with the government shutdown ending, a delay in decisions regarding the debt ceiling to early next year and a general sigh of relief as markets assessed that that Yellen would be a dovish central banker. This motivated yield seeking investors to rally equities and high yield debt. We see this continuing into Yellen’s Senate confirmation in November.

Fund Commentary

NexC holds 40 names diversified across 11 sectors and profited from the rally in the equities markets. The portfolio saw positive performance across all sectors, with the best sectors being Consumer Staples, Information Technology and Consumer Discretionary. The worst performing sectors were Industrials, Energy and Materials.

The best performing single stocks were Lorillard, Bristol-Myers Squibb and Thomson Reuters, while the portfolio’s worst performing stocks where Merck, Cominar REIT and Southern Company. Bristol Myers had strong pipeline growth, Lorillard continues to see upside from stellar sales numbers from its e-cigarette product line and Thomson Reuters executed well under declining margins by keeping their costs under control. Southern Company’s growth story seems to be disappointing to investors after three consecutive earnings releases were below estimates. Cominar REIT continues to be out of favour with investors as their FFO run rate is affected by their leverage. Merck announced that it would lay off 8,500 workers and reorganize its R&D efforts. This negative news combined with existing concerns around its Januvia franchise saw the stock sell off significantly. Overall, the Fund’s top performers significantly outpaced the laggards.

The Fund continued its options overwriting program on 16 Canadian names and 9 U.S. names. 28 of the 40 equity investments in the Fund are Canadian. The remaining U.S. investments are approximately 90% currency hedged. The Fund has the ability to use leverage but the facility remains undrawn.

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