Wednesday November 12th, 2014
The Fund holds a portfolio of fundamentally selected stocks together with a dynamic futures hedge. The strategy is also offered in an un-hedged fund (TSX: PHE.B) which maintains the same portfolio of equities and short S&P futures but does not hedge its USD exposure.
The Fund was positive in October. The best performing sectors were healthcare, consumer discretionary and industrials while energy and telcoms were the worst performers.
The best performing stocks were Nu Skin Enterprises, Whirlpool and Textron. Nu Skin managed to bounce off recent lows after the announcement of a new $375 million credit facility and on news that it would have more flexibility around dividend payments and share buybacks. Whirlpool rallied higher, despite slightly missing earnings estimates. Management reiterated its operating guidance and was upbeat on the North American sales cycle. The company also completed its 51% acquisition of China’s Hefei Sanyo which was viewed as a positive. Textron surged higher after easily surpassing earnings expectations. Q3 profit rose 61% and the company boosted its full year earnings forecast to reflect strength in its Aviation unit.
The worst performers were IBM, Freeport-Mcmoran and Avon. IBM missed Q3 earnings by a wide margin, cut its outlook and withdrew its $20 EPS for 2015. Freeport-McMoran fell after seeing a 32% drop in its quarterly profits. Copper production declined out of its Indonesian mine, while gold sales actually rose but this was offset by a decline in overall gold prices. Avon slumped after seeing revenues fall 8% year over year. The company blamed the strong U.S. dollar and higher supply chain costs for the weak results.
The Fund completed a monthly rebalance, turning over 19 names in the portfolio. The new additions were Asbury Automotive Group, Apache Corp, Arrow Electronics, Ascena Retail Group, Avon Products, Bed Bath &Beyond, Cal-Maine Foods, Celanese, Chesapeake Energy, EMC, Ford, International Paper, Jacobs Engineering, KBR, Oasis Petroleum, ON Semiconductor, PBF Energy, SM Energy and Exelis. The positions sold from the portfolio were Bloomin’ Brands, ConocoPhillips, Copa Holdings, Cisco, Dana Holding, Amdocs, Dr. Pepper Snapple, DSW, Emcor, GNC, Lockheed Martin, National Oilwell Varco, Oil states International, Occidental Petroleum, Package Corp of America, Philip Morris International, AT&T , Domtar and Exxon.
The rebalance increased the short futures hedge to approximately 44% of the Fund’s NAV.
The Fund continued to hedge its USD currency exposure maintaining a net USD exposure at approximately 10% of the Fund’s NAV.
October was a bit of a roller coaster ride as markets sold off heavily in the first half of the month before bouncing back rapidly in the second half. Stock markets were initially dragged lower on fears of global slowdown as the IMF cut the global growth outlook while poor European economic data pointed towards a shaky recovery. Cyclical commodity sectors were hit hardest with energy and materials leading the sell-off. However, momentum shifted mid-month as the beginning of the ECB’s bond buying stimulus program combined with dovish Fed comments seemed to turn around the negative sentiment. Expectations of solid U.S. corporate earnings coupled with a strong GDP print helped drive a rebound in stocks. To close out the month, the Bank of Japan unexpectedly boosted its own stimulus measures accelerating purchases of bonds and domestic stocks, which gave a further lift to global markets.
This month commodities performance was mixed. The energy complex continued to see downward pressure from supply overhang. Gold broke lower as safe haven trades were exited and the dollar rallied. Grains bucked the trend and saw a squeeze higher on concerns that poor weather would negatively affect the harvest.
The U.S. dollar saw some initial weakness in October before rallying back later to close out the month strong. The loonie ended slightly weaker versus the dollar at 1.1260.