NexC Partners Corp. August Commentary

Market Commentary

Early in the month, geopolitical issues worried markets as conflict in Russia/Ukraine and Gaza continued unabated, while U.S. military action escalated in Iraq. Nonetheless, markets eventually shrugged off these concerns, and resumed dip buying which propelled U.S. and Canadian markets to all-time highs. After much fretting over the recent strength of U.S. data, payrolls came in slightly less than expected. At Jackson Hole, Yellen continued to voice concern over labour market slack, which helped calm the hawkish calls and provide a relief rally for rates. Corporate earnings for Q2 were generally positive and GDP growth figures were also solid. In Europe, weak economic activity was troubling for the recovery and spurred more calls for further accommodative action from the ECB.
In commodities, crude sank lower despite the turmoil in Russia and the Middle East. Supply overhang, coupled with declining Asian demand, were headwinds for energy prices. Gold and copper declined while grains staged a slight bounce off the lows.
In the credit markets, high yield had a dramatic bounce from July’s sell-off, as investors stepped in and bought the dip.
The U.S. dollar continued to see strength against most major currencies, however the loonie was able to buck the trend. Strong Canadian jobs data and M&A flows provided a tailwind for CAD strength during the month.

Fund Commentary

The Fund had positive returns in August as equity markets rallied back to the highs. Portfolio gains were primarily driven by positive earnings and event catalysts across the portfolio holdings. The best performing sectors were utilities, consumer discretionary and consumer staples, while materials and telecoms lagged.

The best performing stocks were Tim Horton’s, Keyera Corp and Pembina Pipeline Corp. Tim Horton’s was the Fund’s largest holding and it rallied over 40% after Burger King announced a US$10.9 billion acquisition in a cash and stock deal. Keyera reported Q2 EPS which surprised to the upside and pointed towards strong demand outlook for their midstream services. Pembina also rallied on positive Q2 earnings.

The Fund’s worst performing stocks were Teck Resources, Bank of Nova Scotia and George Weston. Teck Resources underperformed due to weak fundamentals across copper and coal markets. Bank of Nova Scotia reported its Q3 earnings which generally met estimates, however there were concerns about growth prospects from its core operations which took the stock down. George Weston saw profit taking after it jumped higher in July.

The Fund completed its quarterly rebalance and increased its U.S. holdings to 50% of the Fund. The Fund added Agrium, Enbridge, Mcdonald’s, National Bank of Canada, Pfizer and Taubman Centers Inc. and removed Great-West Life, H&R Reit, Macerish, Telus, Teck Resources, and Tim Horton’s. The new portfolio is now evenly split between 20 Canadian and 20 U.S. names, and continues to hedge USD currency exposure, maintaining a net USD exposure of approximately 10% of the Fund’s NAV. Option overwriting program was maintained on approximately 15% of the equity exposure. The USD hedging strategy provided a tailwind this month as CAD appreciated on rumoured M&A flows tied to the Tim Horton’s acquisition. The Fund has not deployed leverage.

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