Purpose Tactical Hedged Equity Fund June Commentary

Market Commentary

The month of June saw a continuation of the equity markets rallying to new highs as central governments reaffirmed their commitment to low rates for a prolonged period of time. Geopolitical concerns in Iraq and the U.S. stance on crude oil exports caused volatility in the energy sector but had little effect on the general equity markets. Volatility continued to sink to multi-year lows across most major asset classes.

The U.S. continued to see improving employment, ISM and PMI, which pointed towards a recovery back to pre-financial crisis levels. Chinese data showed some improvement which served as a reaffirmation of a recovery from pre-financial crisis levels. The ECB launched additional easing in June where they instituted negative rates for the first time in their Deposit Facility and maintained policy to target deflation in the area.

In commodities, energy and precious metals gained while agriculture and base metals declined. Specifically, gold and silver gained as investors rushed back into safe haven investments after renewed conflict in Iraq and the prolonged outlook for a low rate environment. Oil was also up as both WTI and Brent spiked following supply disruption in the Middle East resulting from escalating Middle East tensions.

The Canadian dollar strengthened against the U.S. dollar. The U.S. dollar ended the month at six month lows at levels around 1.06. Previous forecasts had called for a 1.15 U.S. dollar, but the current strength in the Canadian dollar can be attributed to higher WTI oil, and a better than expected May CPI report in Canada, which showed 2% plus inflation for the first time in 2 years. This pointed towards rising inflation in Canada, but did not shake the BoC’s general view of a prolonged low inflation environment. They attributed the 2% plus move to a spike in energy costs which is not indicative of core inflation, and kept rates at 1%.

Fund Commentary

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

The Fund gained in June as equities continued to rally to new highs during the month. The best performing sectors were energy, telecommunications and industrials, while the worst performing sectors were consumer staples, health care and consumer discretionary.

The best performing stocks were Jabil Circuit, National Oilwell Varco and Conoco Phillips, while the worst performing stocks were Tyson Foods, Pier 1 Imports and ConAgra Foods.

Jabil Circuit was a top performer, which continued to benefit from the rally in Apple. The company, a key supplier for the iPhone 6.0, reported strong earnings mid month, beating analyst expectations and maintaining their FY15 earnings guidance on the back of a renewed Apple product ramp-up for the next generation of devices. National Oilwell Varco was also a top performer. The company spun off their distribution business at the beginning of the June. The distribution business was 20% of their revenue but only 7% of their EBIT, and the market saw this as an accretive divestiture. They also revamped their segment reporting to provide more clarity on their different businesses which led to increased research coverage. Conoco Phillips is a top 3 producer of condensate in the Eagle Ford shale oil region and benefitted from the Commerce department’s approval of condensate exports. Eagle Ford producers of condensate are expected to benefit more than Marcellus producers due to their proximity to the Gulf coast.

Tyson Foods underperformed in June as the company made a bid for Hillshire Brands, planning to pay almost a 70% premium for the company. This acquisition was subject to the termination of Hillshire’s bid for Pinnacle foods. Pier 1 imports also declined in June after earnings which were far below expectations. The company continued to experience negative margin growth from discounting which the company sought to offset from increasing growth from ecommerce sales. ConAgra foods declined in June following a negative pre-earnings announcement of a $681m charge, weak consumer and private label sales and lower eps guidance for Q4 2014.

The Fund completed a monthly rebalance at the end of June, turning over 6 names in the portfolio. The equities rebalance targeted profit taking and diversification. Positions were added in DSW Inc., Eastman Chemical, Flowers Foods, Leidos Holdings, Sally Beauty Holdings and Exelis Inc, and positions were sold in Applied Industrial Tech, Avon Products, Celanese Corp, Dana Holdings, Jabil Circuits and Pier 1 Imports. The rebalance maintained the short futures hedge to approximately 21.4% of the Fund.

The Fund continued to hedge its USD currency exposure, maintaining a net USD exposure at approximately 10% of the Fund’s NAV. This month the Fund’s USD hedging strategy contributed positively to the Fund’s performance as the U.S. dollar declined from the 1.08 level to the 1.06 level by month end.

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