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 Preservation Trust cut its exposure during the month resulting in a negative net market exposure of -7% (beta adjusted net exposure = -36%) at month end and experienced a gain of 1.58% on the month. Year to date the fund is down 0.98%. The monthly return can be attributed to gains in  financial, consumer cyclical and communications sector positions as well as various index unit short positions. These gains were offset by losses in the basic materials and consumer non-cyclical sectors.
Positions in the financial sector combined for gains of approximately (+1.0%), while consumer cyclical sector positions combined for gains of (+0.5%) on the month. Communications sector positions added to returns a further (+0.3%) in August while various index unit short positions also added (+0.2%).
Meanwhile, basic materials sector positions dragged on returns (-0.4%) and consumer non-cyclical positions lost (-0.1%).
The US long and short books and the Canadian short book combined to add to returns (+1.8%) while Canadian long book offset some of these gains (approximately -0.2%).
At the end of August, the fund was net flat in Canada (0%) and net short in the US (-7%).  Overall, approximately 51% of the fund was invested in Canada and 49% in the US.  Net exposure stood at -7% by the end of the month due mainly to security-specific investment ideas, while gross exposure stood at approximately 116%.
With the ongoing uncertainty in the economy, several longer term structural issues and rising deflationary risks, the manager intends to maintain a defensive stance. Since its inception the Preservation Trust has shown a negative correlation (-0.28) to its benchmark, equal weightings of the S&P 500 and S&P/TSX Composite Index. The Preservation Trust has demonstrated an ability to outperform in tougher market environments since its inception in May 1999 and has generated annualized returns of 14.0% while its benchmark has gained 1.4% annualized over the same period.