NexC September Commentary

Fund Commentary

Risk assets around the globe experienced volatility surrounding the mid-month FOMC meeting, which caught much of the market by surprise when the Fed held off on tapering quantitative easing. After preparing markets over the past months for the beginning of tapering, the Fed ultimately decided that recent data, in particular a weak August jobs figure, was not strong enough to warrant a reduction in stimulus. As a result, equities rebounded higher, with the S&P briefly making new all time highs before giving up some of its gains into month end. The U.S. dollar saw weakness, and U.S. yields sank lower after briefly testing 3% on the 10yr U.S. Treasury. Middle East tensions waned, as a diplomatic approach prevailed, which saw a reversal in safe haven flows across energy and gold. China’s economic data was positive showing signs of stabilization, which helped emerging market assets recover higher after a quarter of weakness. The Bank of Canada maintained a tightening bias, even though economic indicators have kept current policy rates at 1%. This is consistent with most central bankers who have repeated their commitment to keeping rates at current levels for an extended period of time.

The Fund’s NAV appreciated as both Canadian and U.S. stocks rallied. There was no name turnover in September, and the portfolio maintained a balance of approximately 70% in Canadian names and 30% in U.S. names. The portfolio benefitted from our decision to postpone the call overwriting program until the end of the month. This was based on our view that option premiums did not compensate for the systematic and idiosyncratic event risk arising from the Fed meeting, the wireless auction in Canada, and bank earnings. Currency hedging provided some protection from the decline in USD. The fund is currently not using leverage.

The Fund’s top performers were Rogers Communications, Bristol-Myers Squibb, and Finning International. The weakest performers were Shaw Communications, Agrium, and Southern Co. The telecom sector was active in September as Verizon made it clear it would not seek a Canadian acquisition, and chose not to participate in the Canadian wireless spectrum auction. Rogers benefitted from Verizon’s reversal and the stock was up over 10% overnight on Sept 3 and returned to its June levels after the Sept 17 auction filing deadline. Bristol Myers Squibb was upgraded by analysts on reports of successes in their PD-1 immunotherapy program which improves their pipeline considerably. The stock also benefitted from the market rally after Fed comments in mid September. Finning International was up 13.24% in the month of September after selling off after earnings missed their forecast. The company installed a new CEO in late June, and the market responded positively to an outlined change in strategy to re-align operations for increased profitability from its parts and service business, and growth in non-mining markets.

Shaw Communications gave up gains as traders unwound spread positions between telecoms. Agrium lowered their outlook by $200M for 3Q earnings. However, the company did increase their dividend by 50% to a quarterly dividend of $0.75/share or a 3.3% yield. Southern Co was volatile due to an attractive valuation driving yield seekers into the name. Unfortunately, profit taking and negative news around an EPA proposal which limits CO2 emissions/MwH subsequently caused the stock to drop.

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