O C T O B E R 2 0 1 4
EXEMPLAR CANADIAN FOCUS PORTFOLIO
Experience. Intelligent Investing.
TINA Rescues Markets.
by Veronika Hirsch, Portolio Manager, Arrow Capital Management
We have endured 2 months of market turmoil as investors worried about the markedly slowing global economic growth, ācontrolled decelerationā of the Chinese economy and especially the substantial financial, political and structural issues Europeans are unable to tackle. In the end, TINA (There Is No Alternative) came to the rescue and equity markets recovered almost as fast as they swooned, with a positive earnings trendās help. We have also noticed that markets were more likely to punish companies reporting poor results.
Hopefully, this is a precursor to a āmarket of stocksā, where stock prices are better aligned with current company fundamentals. We fully expect volatile after-shocks to continue in response to the bad news, of which there seems to be an endless supply. Fortunately, we have just entered the favorable year-end seasonality. Market participants are beginning to discount next yearās earnings growth, which along with TINA should result in a buoyant year-end rally.
I have taken advantage of this correction to deploy my hefty cash hoard by adding companies exposed to the relatively healthy US economy. In addition to gaining exposure to the best performing global economy, I am positioning the portfolios to benefit from F/X tailwinds. This has been my strategy for some time now and it started bearing fruit during the Q3 reporting season, when many companies held in the portfolios delivered better results partly because of the F/X benefits. Currently I am mostly buying defensive GROWTH stocks, which are able to deliver reliable results even in this difficult environment.
At no point did I feel tempted to delve into the decimated resource sectors, which still carry too much risk. I did some upgrading of the energy portfolio without adding substantially to the weighting. The withdrawal from QE is occurring at a time when slowing global growth will require monetary stimulus in Europe and Japan, which will reinforce the already well established rising US dollar trend.
Strong US currency is a major headwind for most commodity prices, which need to trade at lower levels in order to reflect their underlying fundamentals of excess supply during weak global demand. I am hardly a commodity expert, but if the November OPEC meeting doesnāt end in agreement, we might get another chance to buy cheap energy stocks.
October was a good test to all of our portfolios. With low exposure to commodity sectors and active shorting, all 3 Portfolios had positive returns:
The Hirsch Performance Fund performed the best with a 2.1% return, as it benefited from several meaningful short positions. The Exemplar Performance Fund had a 1.8% return. The fund had the highest cash position coming into September, reaching 40% at one point. I invested about half the cash hoard during October. I found it more prudent to wait until after the earnings release before buying some of the more controversial stocks. Sometimes the volatility surrounding the earnings release gave me an attractive trading opportunity.
The Exemplar Canadian Focus Portfolio had a 1.6% return. I have eliminated Black Diamond from the portfolio between September and early October. I like the management of BDI, but the dismal results at competitor HNL were an indicator of deteriorating fundamentals. As you might recall, I have eliminated a small HNL trading position from the portfolio much earlier in the year when it became apparent from poor guidance that management did not have a good handle on the business. I have much more faith in BDI management and will most likely revisit the stock when the LNG projects become reality. I have been adding to the LINAMAR and CALLIDUS positions during the correction, as both stocks are illiquid and difficult to buy in a rising market. Subsequent favorable earnings reports proved them to have been good additions.
For the second month in a row Intertain Group was the best performing stock in all 3 portfolios, rising 23.6% in October after a much more impressive 46.8% gain in September. No surprise: all energy related stocks were a big drag.
Thank you for your continued interest in the Fund. For further information, please contact your regional Arrow Capital representative.
Sincerely,
Veronika Hirsch
Portfolio Manager
Read/Download Veronika Hirsch's Commentary below:
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Commissions, trailing commissions, management, performance and other fees may be associated with this investment. Investors should read the offering memorandum before investing. Unless otherwise stipulated returns are for Series A units in Canadian funds. Except as otherwise noted returns are historical compounded total returns including changes in the unit value and reinvestment of all dividends or distributions and do not take into account the sales, redemption, distributions or optional charges or income tax payable by the investor that may affect the compound growth rate and are not intended to reflect the future value of the fund . Past performance may not be repeated. Offering of units in the Hirsch Performance Fund are made pursuant to the Confidential Offering Memorandum (OM) only to those investors who meet certain eligibility or minimum purchase requirements. Important information, including the fundās fundamental investment objective is contained in the OM which may be obtained from Arrow Capital Management Inc.
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