August 2010

In August, North American equity market performance diverged at the border. The Canadian market was up modestly while the US equity markets were decidedly negative. In Canada, the S&P/TSX Composite Index rose 1.71%. Meanwhile the US markets posted very negative returns; the S&P 500 lost 4.74% in August and the DJIA was also negative for the month (-4.31%). The NASDAQ index posted a significant decrease of 6.24%. Year to date the S&P/TSX Composite Index has gained 1.43%, meanwhile the S&P 500 has fallen (-5.90%), the DJIA is down (-3.96%) and the NASDAQ index is down (-6.84%).
The Focused Opportunities Fund maintained a positive net market exposure of 24% (beta adjusted net exposure= +2%) during August and experienced a gain of 0.85% on the month. Year to date the fund is up 1.64%. The gain can be attributed to positions in the communications, basic materials and consumer cyclical sectors as well as various index unit short positions. Meanwhile, positions in the technology and industrials sector offset some of these gains.
Specifically, positions in the communications sector rose (+0.4%), while positions in the basic materials sector also added to returns (+0.3%) for the month. Consumer cyclical sector positions added another (+0.3%) while various index unit positions added (+0.3%) on the month.
These gains were offset by losses in technology sector (-0.7%) and industrial sector (-0.1%) positions which combined to drag returns in August.
Gains were recorded by the Canadian long book and the US short book (+1.3% contribution) while the Canadian short book and US long book dragged returns (approximately -0.4%) on the month.
At the end of August the fund was net long in Canada (+22%) and net long in the US (+2%).  Overall, approximately 51% of the fund was invested in Canada and 49% in the US.  Net exposure stood at +24% by the end of the month due mainly to security-specific investment ideas, while gross exposure stood at approximately 99%.
With the ongoing uncertainty in the economy, several longer term structural issues and rising deflationary risks, the manager intends to maintain a defensive stance. We continue to believe that the returns of this fund will be generated by security specific events rather than the overall movements of the equity markets. Since inception, the fund has delivered strong risk-adjusted performance with an 8.9% annualized return, and a low correlation to equity markets while the benchmark S&P/TSX Composite Index has returned 4.2% annualized over the same period. Since inception the Focused Opportunities Fund has had a volatility of 7.4% versus 16.8% for its benchmark. The fund has also protected capital well with a maximum drawdown since inception of 14% compared to a 44% drawdown for the S&P/TSX Composite over the same time period.