Wednesday August 13th, 2014
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.
The Fund tactically allocates across the credit spectrum including high yield, investment grade, government bonds, and cash. The Fund declined during the month of July. The portfolio currently has exposure to high yield, investment grade and government debt.
The current portfolio is positioned to benefit from increasing demand for corporate debt, with a tilt towards high yield over investment grade debt. With the Fed remaining highly accommodative and the outlook for low rates likely to extend further, the hunt for yield continues to drive demand, but high yield took a breather this month as investors took some profits on the back of increasing risk aversion and anxiety over increasing interest rates. The Fund’s exposure to corporate debt and government debt finished higher this month.
The Fund maintained its position of approximately 66% in high yield debt, increased its exposure to investment grade to approximately 33%, and decreased its exposure to government debt to approximately 0.10%. Cash was maintained at approximately 0.5%.