Equity Fund Commentary
January 2010
The Canadian market finished the year on a strong note, with the S&P/TSX Composite Index gaining 3.9% in the quarter. Global markets weren’t quite as robust, rising 1.8% as measured by the MSCI World Index (in Canadian dollar terms). Over the past year, the Canadian market was up an impressive 35.1%, while the World Index gained 10.4%.
The Equity Fund advanced 0.7% in the quarter and was up 16.5% over the past 12 months.
The fund’s performance over the year was held back by the strong loonie, which appreciated 18% against the U.S. dollar, 14% against the euro, 5% against the British pound and over 20% against the yen. The fund holds roughly 40% of its investments in foreign companies.
While stocks around the globe had a strong year, investors were paid particularly well for taking on risk. In other words, the developing markets and commodity-related stocks turned in exceptionally strong returns. Financial stocks, which suffered large setbacks in 2008, also rebounded sharply.
Not coincidentally, the fund’s strongest performers in ‘09 were financial and resource companies – Home Capital Group (which more than doubled), TD Bank, Birchcliff Energy, and Suncor Energy (all up more than 50%). Cisco Systems and Idexx Laboratories also turned in strong performance, but as noted above, the rising loonie dampened their impact.
The manager, CGOV, favored stocks with a defensive tilt over the year. Companies such as Shoppers Drug Mart, CVS Caremark, Diageo, Rogers Communications and Unilever (a new addition) are examples. These businesses have very healthy balance sheets, generate lots of free cash and are in a good position to make timely acquisitions and/or buy back shares.
By and large, however, defensive stocks experienced more muted gains while the markets soared. Yet, the manager believes that these types of higher quality companies will be the market leaders in a slow-growth economic environment going forward.
The glaring hole in the portfolio in 2009 was Nintendo, which fell more than 30%. CGOV initially bought the stock because they liked its valuation and the company’s strong market position. They are disappointed, however, with the company’s financial results, and are rethinking the sustainablility of Nintendo’s competitive advantage.
Manulife was also a sore spot. The company cut its dividend and raised additional capital (diluting existing shareholders) to strengthen its balance sheet following some poor decisions by management last year. Investors dumped the stock, fearing there may be more skeletons in the closet. CGOV, however, didn’t succumb to capitulation but rather bought additional shares late in the year, as they felt the stock was oversold and represented good value.
Turnover in the fund has been low, dear to CGOV’s investment philosophy. Over the quarter, no stocks were sold, and one new position was added, Unilever (a consumer products giant that has attractive exposure to the emerging markets). The manager, however, is closely watching valuations and anticipates a few changes in the coming months.
True to our “undex” moniker, the fund continues to look much different than the index. Going forward, CGOV feels that a Canada-focused portfolio with less emphasis on commodities and more focus on businesses with viable competitive advantages and solid balance sheets will be the most effective strategy for making and preserving money.