Purpose Tactical Hedged Equity Fund July Commentary

Market Commentary

July can be summarized as a volatile month which initially saw a continuation of the equity market rally, but ended with a sharp correction lower into month end. Consequently, volatility came off multi-year lows, rebounding higher as equity markets sold off. Geopolitical concerns in Ukraine were front and center with the EU and U.S. jointly increasing sanctions on Russian entities to put a stop to the escalating conflict.

The U.S. economy strengthened further, with improving employment, manufacturing and higher inflation increasing the probability of a rise in interest rates. China equities strengthened with stronger manufacturing numbers. Europe was volatile as markets reacted to a potential bank default in Portugal.

In commodities, base metals outperformed while energy, precious metals and agriculture declined. Copper outperformed on improving manufacturing data in the U.S. and China. Oil declined as supply was not impacted by rising tensions in the Middle East. Gold and silver were uncharacteristically lower even as rising inflation and major geopolitical events affected the markets. Corn continued to decline after the WASDE report showed a 9% increase in corn acreage, a potential bumper crop for 2014/15. Soy also declined in anticipation of a bumper 2014/15 harvest.

In the credit markets, high yield sold off as general risk aversion and anxiety over higher interest rates caused investors to pare back.

The U.S. dollar rebounded across major currencies on improving interest rate differentials and safe haven demand. The U.S. dollar was up to 1.09 levels versus the Canadian dollar by month end. The weaker Canadian dollar was attributed to weaker energy prices and the BoC’s continued commitment to low rates.

Fund Commentary

The Fund holds a portfolio of fundamentally selected stocks together with a dynamic futures hedge. The Fund also incorporates an un-hedged series (PHE/B) which maintains the same portfolio of equities and short S&P futures but does not hedge its USD exposure.

The Fund declined in July as midcap equities declined during the month. The best performing sectors were information technology, telecommunications and consumer staples, while the worst performing sectors were materials, industrials and health care. The Fund’s short index futures exposure contributed positively to the fund.

The best performing stocks were URS Corp, Bed Bath and Beyond and NetApp Inc, while the worst performing stocks were Oshkosh, WellCare Health Plans and Anixter International.

URS Corp gained after AECOM Technology made a bid to acquire the company for close to 20% premium. Bed Bath & Beyond gained in July, the company had sold off sharply after reporting declining margins, but has since been picked up as a value name as they slowly transition to a more online presence to offset a declining brick and mortar business. NetApp gained in July from continued interest as a potential tax inversion acquirer. They hold approximately 80% of their cash overseas and a tax inversion acquisition of a foreign domiciled target would allow the company to repatriate their cash to the U.S. and lower their effective tax rate.

Oshkosh declined this month after reporting earnings which showed a 40% decline in defence spending. WellCare Health Plans declined as the company missed earnings from higher than expected medical benefit expenses, which increased 41% and an impairment charge of $0.35 of intangible assets from their 2012 acquisition of Easy Choice Health Plan. Anixter International declined after missing earnings. The company experienced higher input costs from increasing copper prices.

The Fund completed a monthly rebalance at the end of July, turning over 13 names in the portfolio. The equities rebalance targeted profit taking and diversification. We added positions in Aaron’s Inc, Best Buy Inc, Computer Sciences Corp, Convergys Corp, Dana Holding Corp, Juniper Networks Inc, Lockheed Martin Corp, Oil States International, Pfizer, Timken Co, Textron Inc, Domtar Corp and Exxon Mobile Corp, and sold positions in CVR Energy, Dow Chemical, Ford Motor Co, General Motors Co, Ingram Micro Inc, KBR Inc, Phillips 66, Sally Beauty Holdings, AT&T, Tutor Perini Corp, URS Corp, Wellcare Healthcare Plans and Xerox Corp. The rebalance maintained the short futures hedge at approximately 21.4% of the Fund’s NAV.

The Fund continued to hedge its USD currency exposure maintaining a net long USD exposure at approximately 10% of the Fund’s NAV.

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