2009 3rd Quarter Report
Building on the last two quarters of positive performance, the Van Arbor Funds had another great quarter with the Canadian Fund returning 14.55% (TSX 9.65%) and the World Fund returning 8.25% (World Index 7.82%). With three fourths of the year complete, both Funds remain the top ranked Canadian Equity and Global Equity Funds in Canada over multiple time frames. Even though 2009 has been a great year so far, we would like to highlight the fact that both Funds are one of the best performing mutual funds (all classes) in Canada over the last 12 months. We highlight this, because although we are enjoying a strong year to date on the upside, we also managed the downside last year just as well. So, while markets are almost returning to their value last fall, both Funds are up just over 40% from before the crash. Just another reason why having an actively managed portfolio that focuses on capital appreciation as much as capital preservation matters in a market that may not favor passive investing.
The rest of the year promises to be an exciting opportunity to see selective relative gains in areas of the market which have been largely ignored, while also looking towards positioning for the best opportunities as we approach next year. From our perspective, there are plentiful of ideas that we are positioning into now which we believe will start to show some leadership going into next year. Some examples of the type of companies that we are transitioning into are stable cash flow producing companies in less cyclical sectors of the economy, which have been mainly ignored over the recent market rally. Many of these companies are mispriced in our opinion as the market has placed too low a valuation on their stable revenues and very attractive dividend yields. At the same time they offer less volatility than the overall market and economy, thus giving us a great risk/reward opportunity.
Economic Update
The Canadian economy continues to show its resilience relative to other developed nations around the World. Some of the consumer, financial, and housing problems plaguing our southern neighbor have failed to materialize here. A more conservative attitude towards credit, housing and consumption has all helped the domestic economy avoid large booms and busts. At the same time, Canada is gaining an international reputation as an alternative to the US as a place to invest in terms of currency, bonds, equities, and even housing. All of which will keep inflation on the radar as international investment flows provide support to demand. The one downside to the economy has been the appreciating Loonie, which continues to hurt the export sector. From our perceptive the high value of the Loonie today is an excellent opportunity for Canadians to use their strong currency to purchase now cheaper foreign assets via the World Fund, which invests in the US, Europe, and developed Asia.
Canadian Advantage Fund
The Canadian Fund had a relatively flat September, rising 0.85% while the TSX rose 4.57%. Much of the one month portfolio lag was due to the portfolio transitioning into new ideas which better fit our current analysis. In terms of the market, the energy and material sectors were the best performers last month as markets continue to price in the rebound in economic activity. We have been transitioning out of some of these sectors as they have become more fairly valued and more importantly because we see better select value opportunities in other segments of the Canadian market place. Some examples of newly established positions that we like are Loblaw’s and Shaw Communications. Both have been largely ignored over the cyclical rally, yet both offer excellent cash flow generation along with very attractive dividend yields. Characteristics which we believe the market is mispricing in terms of value and thus offers a good opportunity for capital appreciation relative to risk.
World Advantage Fund
The World Fund fell modestly last month, ending down 1.87% while the MSCI World Index rose 1.49%. The strong Canadian Dollar didn’t help the portfolio last month, being the only negative contributor to return. We expect foreign currencies like the US Dollar to begin to appreciate over the coming months, which is all the more reason why we advocate diversifying equity holdings into international assets as a way to capitalize on the strength of the Loonie. Last month was also a transition month for the portfolio as we locked in some profits from some of our many ideas in the material and industrial space. At the same time we have been positioning into other areas of the market like US grocers, Japanese utilities and Hong Kong infrastructure companies. Given the diverse selection of companies, sectors and currencies throughout the developed World, we are finding no shortage of opportunities which fit our current analysis and which we believe offer our clients excellent capital growth as we move into 2010.
