Purpose Tactical Hedged Equity Fund September Commentary

Risk assets around the globe experienced volatility surrounding the mid-month FOMC meeting, which caught much of the market by surprise when the Fed held off on tapering quantitative easing. After preparing markets over the past months for the beginning of tapering, the Fed ultimately decided that recent data, in particular a weak August jobs figure, was not strong enough to warrant a reduction in stimulus. As a result, equities rebounded higher, with the S&P briefly making new all time highs before giving up some of its gains into month end. The U.S. dollar saw weakness, and U.S. yields sank lower after briefly testing 3% on the 10yr U.S. Treasury. Middle East tensions waned, as a diplomatic approach prevailed, which saw a reversal in safe haven flows across energy and gold. China’s economic data was positive showing signs of stabilization, which helped emerging market assets recover higher after a quarter of weakness. The Bank of Canada maintained a tightening bias, even though economic indicators have kept current policy rates at 1%. This is consistent with most central bankers who have repeated their commitment to keeping rates at current levels for an extended period of time.

Purpose Tactical Hedged Equity Fund’s September performance was positive due in large part to net exposure at approximately 65%, which is near the upper end of the fund’s tactical net exposure range. This net exposure benefited in September from the equity market rebound.

The top 3 positions for the month were Domtar, Louisiana-Pacific Corp and Energy XXI. Domtar, Canada’s largest paper company, was up 16% after it was expected to fill the capacity gap left from International Paper’s decision to shut down a plant that would remove an estimated 8% of the North American capacity in the white-paper market. The stock price of Louisiana-Pacific Corp (LPX) was up significantly after the board of directors of Ainsworth Lumber Co Ltd agreed to be acquired by LPX for approximately $1.1B, a 23.48% premium. The deal is seen as accretive to Louisiana-Pacific Corp and provides a global platform for Ainsworth’s lumber products. The transaction will still require approval from two thirds of Louisiana-Pacific Corp’s shareholders and is expected to close at the end of the year. Energy XXI had earnings of $0.69/share at the end of August, beating expectations by 47%. The stock is seen as an M&A target because it appears undervalued vs. NAV as their reserve growth of 50% was not priced into the stock. Positive momentum on the stock carried forward into September with the stock increasing almost 14% over the month.

The bottom 3 positions for the month were Delek US Holdings, Marathon Petroleum, and Energizer Holdings. All three are in the refiner’s space which suffered in September as refining spreads narrowed. Analysts cut 2014 estimates significantly based on expectations of the company missing their earnings per share targets as early as Q3. Delek was down 15% for the month and continues to trend lower. Marathon Petroleum was down 11.3% as they reported a lower than expected 23% earnings per share at the end of August, and was affected by narrowing refinery spreads. Energizer was down 8% over the month of September as their sales growth continues to disappoint the street. The stock lost 3% of its value on Sept 3 as short interest increased on the name.

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