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 Focused Opportunities Fund increased its net market exposure to +57% (beta adjusted net exposure= +44%) during October and generated a gain of 2.29% on the month. Year to date the fund is down 8.58%. Fund positions in the consumer cyclical, basic materials, communications, energy & technology sectors were up for the month; while the industrial sector and index unit short positions were down . The Canadian and US long books generated gains for the month, however, the Canadian and US short books recorded losses. At the end of October the fund was net long in Canada (+40%) and net long in the US (+17%). Overall, approximately 54% of the fund was invested in Canada and 46% in the US. Net exposure stood at +57% at the end of the month due mainly to security-specific investment ideas, while gross exposure stood at approximately 121%.
After a weak September, equity markets rebounded in October on the back of improved U.S. economic data, strong initial Q3 earnings, and the announcement of a comprehensive European rescue package. While continued equity market volatility remains a concern, we believe that this episode of financial market turmoil will not be of the same magnitude as the 2008 crisis. Corporate balance sheets are strong, earnings growth has been impressive and equity valuation levels are near multi-decade lows relative to bonds. In fact, many large, blue chip corporations are trading at only 10x earnings while providing 3%-4% dividend yields. Despite a somewhat constructive view on equities, we believe it is prudent to maintain a defensive stance during this period of elevated volatility. We remain net long but continue to hold significant hedges in the form of cash, short positions, and an approximate 5% weighting in gold and gold equities. As the true economic impact of the recent market instability and sovereign debt issues becomes more evident we plan to gradually adjust our positioning and add to security specific opportunities. Since inception, the fund has delivered strong risk-adjusted performance with an 6.0% annualized return, and a low correlation to equity markets while the benchmark S&P/TSX Composite Index has returned 3.9% annualized over the same period. Since inception the Focused Opportunities Fund has had a volatility of 7.5% versus 16.1% for its benchmark. The fund has also protected capital well with a maximum drawdown since inception of 14% compared to a 45% drawdown for the S&P/TSX Composite over the same time period.
