October 2011

North American equity markets were up across the board in October.  In Canada, the S&P/TSX Composite Index increased by 5.40%. Meanwhile in the US, the S&P 500 was up 10.77%, the DJIA increased 9.54%, and the NASDAQ index finished 11.14% higher for the month.  Year to date, the S&P/TSX Composite is down 8.86%, the S&P 500 is down 0.35%, the DJIA is up 3.26%, and the NASDAQ has decreased 1.19%.
 
The Patriot Trust increased its net market exposure to +56% (beta adjusted net exposure= +68%) during October and generated a gain of 5.75% on the month.  Year to date the Patriot Trust is down 9.04%.  The gain in October can be attributed to positions in energy, basic materials and industrials.  Communications and various index unit short positions generated losses during the month.  At the end of October the fund was net long in Canada (+45%) and net long in the US (+11%).  Net exposure stood at +56% at the end of the month due mainly to security-specific investment ideas, while gross exposure stood at approximately 132%. Currently, 52% of the Trust’s equity portfolio consists of Canadian equities and 48% is in U.S. securities.  The Trust’s largest weightings were energy at 32%, basic materials at 22%, communications at 14%, and various volatility-dampening equity index short positions totaling 40%.

While extreme market volatility is cause for much investor angst, we continue to believe that for North American markets, there is little indication of another 2008 market style meltdown and less than a 50:50 probability that we will slide back into recession.  Unfortunately the same cannot be said for the Euro zone, the travails of which are dominating headlines and influencing market volatility worldwide.  Yet despite the interconnectedness of global economies and capital markets, the United States is far less likely to be impacted by Euro events since it has already absorbed a great deal of the bitter medicine needed to fix its economy and prepare the way for recovery.  Enormous credit deleveraging which has resulted in the collapse of housing prices, the retrenchment of consumers, and depression type unemployment figures, are now being increasingly viewed through the rear view mirror.  In fact, all-important job creation is now appearing to pick up steam despite the gloomy picture being painted by Bernanke and Company.  Not only has the unemployment rate dropped by almost one percent from a year ago, but valuable private sector jobs are increasing at a rate fast enough to more than compensate for overdue reductions in state and municipal public sector payrolls.  Recent productivity growth of 3%, a devalued U.S. dollar, and strong corporate earnings and balance sheets, are all contributing to a stronger American competitive presence in world markets.  Having said all of this, we still have opted to continue with an unusually defensive positioning of Patriot Trust’s portfolio.  This we have done by retaining near historic lows of net market long exposure (< 60%), continuing to add to positions in large cap dividend paying companies, and an overweighting of energy, precious metals and cash.  Since inception (February 2003) the Trust has generated annualized returns of 10.6% as compared to its TSX benchmark comparable of 7.4%.  In the last 12 months the Patriot Trust experienced modest volatility of 12.9% versus 14.6% for the S&P/TSX Composite Index.