Purpose Multi-Strategy Market Neutral Fund June 2016 Commentary

Fund Highlights

  • The Fund had a positive quarter, as gains in currency positions offset losses across equities and commodities.
  • Currencies experienced heightened volatility largely driven by event risks associated with Brexit. The GBP experienced extreme movement leading into the referendum and one of the largest historical declines after the U.K. voted to leave the European Union. Emerging-Market (EM) currency longs, especially in Brazilian Real, performed well. In an environment of sinking developed market yields, EM currencies offered an attractive and significant carry versus the Euro or the Yen.
  • Commodities were a mixed bag in the quarter. Agricultural longs benefitted from supply and demand dynamics driven mostly by poor weather. Energy shorts detracted as supply and demand began to rebalance which helped crude recover above $50 a barrel.
  • Equities ended down as flows went into the most defensive sectors while value was broadly sold.
  • We expect that with Brexit uncertainty diminished and Federal interest rate hikes on hold, certain value names look very cheap and can potentially experience significant recovery.
  • Overall we are pleased with the diversification available in the Fund. Market neutral positioning will help mitigate the volatility across asset groups and diversification from currency and commodity groups will be more important, especially as fixed income investments become more expensive.

Market Commentary
This quarter, concerns over Brexit and uncertainty over the Federal Reserve’s interest rate policy outlook dominated global markets. The risk of potential events kept investors in a holding pattern ahead of the vote, prompting trading activity to move sideways in the months leading up to the U.K. referendum. The eventual decision to “leave” shocked the markets, which largely anticipated a “stay” vote in the preceding days. As a result, growth expectations for the Eurozone were lowered and the British Pound plunged as bond yields sank to multi-year lows. It also paved the way for possible additional exits from member countries which would exacerbate uncertainty for years to come.
In the U.S., the Feds’ path for another rate hike was shrouded in uncertainty. Therefore, the market had been priced in anticipation of multiple rate hikes this year. However, data that showed slowing employment, sluggish global growth and deflationary price pressures prompted Federal Reserve Chairman Janet Yellen to revert to a dovish stance.
Meanwhile, central banks in Europe and Japan initiated negative interest rate policies which accelerated a global hunt for assets with higher yields. The Canadian economy saw some slight upside surprises to GDP and jobs data. However, concerns over a housing bubble, and the expected drag to growth resulting from the Alberta wildfires in June dampened the country’s economic outlook for the remainder of the year.
Commodities rallied in general. Oil pushed through the $50 a barrel mark as supply and demand continued to adjust. Gold surged higher on safe haven flows and as a store of wealth in a negative yielding environment. Grains, specifically soybeans and corn, rallied as bad weather across South America and the U.S. negatively impacted the supply outlook.

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