Thursday October 16th, 2014
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 was negative in September as equity markets pulled back from the highs. The best performing sectors were healthcare, staples and consumer discretionary while energy, materials and industrials were the worst performers.
The best performing stocks were Cal-Maine Foods, Bloomin’ Brands and Centene while the worst performing were Dana Holding, Rowan Companies and Valero Energy.
Cal-Maine reported positive earnings this month with management giving an upbeat outlook for next year. They noted that demand for eggs was favorable while also seeing an 8% increase in net average selling price. The company also benefited from falling corn prices which helped decrease feed costs. Bloomin’ Brands was hit hard in August after reporting weak earnings guidance, however it was able to bounce back in September as value buyers stepped in. Cenetene was positive as it continued to increase its Medicaid enrollment across the US.
Dana Holdings fell on general weakness across the auto parts sector which saw profit taking this month. Rowan Companies and Valero were caught in the large downdraft across the energy sector this month. Fears of a Chinese slowdown weighed on demand, while large builds in crude inventories and returning Libyan production provided a supply overhang. There were hopes for a potential production cut from OPEC however this never materialized. As a result, WTI fell 5% and Brent crude was down over 8%.
The Fund completed a monthly rebalance, turning over 9 names in the portfolio. We added Macy’s, Kellog, Nu Skin Enterprises, Huntington Ingalls Industries, SPX Corp, Corning, Packaging Corp of America, Owens-Illinois and AT&T. We sold Exelis, Albemarle, Cal-Maine, Cooper Tire and Rubber, International Paper, Leidos Holdings, Tech Data, Tyson Foods and Unifirst.
The rebalance decreased the short futures hedge to approximately 22% 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.
Geopolitical concerns in Russia/Ukraine and the Middle East continued to overhang markets this month. Pro-democracy protests in Hong Kong and an independence referendum in Scotland also contributed to the general sense of unease. Economic data pointed towards slowdown in China, and European data was also sluggish. In response, the PBOC added liquidity to support China’s 5 largest banks, while the ECB made a surprise rate cut and added almost $1tr in stimulus in an attempt to fend off deflationary pressures. Canadian markets fell on weakness experienced across cyclical commodity sectors. The US continued to diverge from other developed nations and posted a strong Q2 GDP, as well as improving economic activity. Speculation over the path of future US interest rate hikes continued to weigh on investors’ minds.
Commodities experienced heavy selling this month as the S&P GSCI closed down 6%. The combination of supply overhang, weak Chinese demand and a strong US dollar saw negative performance across grains, metals and energy.
The US dollar had another month of strong gains. The diverging interest rate and growth outlook between the US and other developed countries saw the US dollar appreciate against every G10 currency. The loonie fell 3% this month to 1.1200.