Fourth Quarter Fund Report
Welcome to the next decade. Investors were tested to extremes this past decade; yet, wherever there is crisis, you can be sure there is opportunity close by. So as we all collectively stared into the abyss a year and half ago and our discipline was tested, we chose to focus and trust our independent analysis on the opportunities that were presenting themselves in 2008. The end result was a truly outstanding year for our Van Arbor Funds.
The Canadian Fund led the pack in 2009, doubling in value and more importantly outperforming the TSX Index by nearly 70%. The World Fund also stood out with its 43% return, beating the World benchmark index by nearly 35%. There is no doubt that 2009 offered better opportunities than most years; however, we like to look at the full two year cycle to gauge our performance over the down and up market.
The more important statistic we like to look at is the performance of the Funds since the TSX peaked in the summer of 2008. Since then, the TSX remains 20% below its peak value, yet both the Van Arbor Canadian and World Fund have increased in value by nearly 40% since the TSX peak. We are proud of that statistic because it exemplifies our focus on capital preservation alongside capital appreciation.
As investment managers, our job is to learn from the past yet look towards the future. So with that being said, we are happy with our past performance but are focused on the opportunities that are shaping up ahead. In the short term we have shifted our attention to areas of the market which have been ignored over the last year. We did very well on materials, energy, and infrastructure companies last year as we were anticipating a strong cyclical rally fueled by fiscal stimulus, monetary reflation, and extreme pessimism. Being value investors, we are always looking for the best absolute and relative current opportunities, and thus have shifted some of our interest to the companies left in the dust in last year’s rally. Companies from the utility, telecom, and consumer staples sectors are trading at great prices relative to the overall market. As the economy stabilizes, these companies will catch up in valuations to the rest of the market and thus offers an opportunity for steady returns over a reasonable time frame.
Over the medium to long term, we see this decade offering great investment prospects outside the typical index portfolio. We saw that last year, in both Funds, our portfolio looked very different than the typical index and was the reason why we were able to greatly outperform the market. The next few years will likely be the same, as we focus on the best opportunities from the material, utility, and infrastructure sectors for example, rather than trying to match the composition of the index. The Global economy is coming out of the economic crisis non-uniformly. Economies in Asia and emerging nations are seeing strong V-shaped recoveries, while other areas of the market are seeing a more tempered recovery due to consumer and business deleveraging. The medium term result will be a lumpy recovery that favors specific areas of the economy, which we will be focusing on. The next three years will likely continue to be a stock picker’s market, which is an environment where we believe Van Arbor will continue to do well in.
Van Arbor Canadian Advantage Fund
The Canadian Fund had a good quarter to cap off a great year, rising 3.4% over the last three months while the TSX rose 2.8%. Economic and market stabilization were the main themes in the last quarter of 2009, with investors digesting the large gains from the March bottom. The recovery now enters a more mature stage of growth with earnings and economic data expected to show nice improvements. We continue to like underrepresented companies in Canada with strong cash flows that are trading at bargain prices. December saw some nice gains from grocers George Weston (+9%) and Metro (+8%), as prices have stabilized, costs remain historically low and profit margins are improving. The key going forward from our perspective will be stabilization giving a lift to the less cyclical companies in Canada which didn’t get a chance to participate in last year’s rally.
Van Arbor World Advantage Fund
The World Fund saw some stock gains last quarter that were tempered a bit by the strength of the Loonie. Overall, the Fund and the market ended the quarter almost flat; yet for the year the World Fund did well rising 43% even as the Loonie rose 15% versus most foreign currencies. We started last year with a bias towards positioning for a weaker US Dollar; however, this year we anticipate some US Dollar strength with the Fed removing excess monetary stimulus as the recovery gains a greater foothold. This should be a net benefit to the Fund, but also offers an opportunity to go around the Globe and pick up companies at discounted prices in Canadian Dollar terms.
