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 Preservation Trust increased its exposure in October resulting in a net market exposure of +49% (beta adjusted net exposure = +35%) at month end and experienced a gain of 0.50% on the month.  The Canadian and US long books were up during the month, however, the Canadian and US short books generated losses.  At the end of September, the fund was net long in Canada (+39%) and net long in the US (+10%).  Overall, approximately 54% of the fund was invested in Canada and 46% in the US. Gross exposure stood at approximately 131%.

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 its inception, Preservation Trust has shown a negative correlation (-0.26) 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 11.0% while its benchmark has gained 2.1% annualized over the same period.