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July 2006 Newsletter
Saturday, July 01, 2006
MARKETS AT A GLANCE: QUARTERLY UPDATE
The sweeping rally of the Canadian equity markets in 2005 and early 2006, prompted investors to lock in some of their gains and reassess the future of the market. In the process this created a broad sell-off in equities and consequently led to an 8% drop in the S&P TSX Index. Long term bulls of global equity markets, like us at Van Arbor, took this opportunity to pick up high quality stocks trading at discounts. In our view, while more volatility can be expected in the future, investors should use this market downturn to their advantage and increase their holdings of value stocks. Commodity bull markets last an average of 15 years, and we're not even half way there!
The S&P TSX finished the second quarter down 4.5%. Speculation in the US market that the economy will be strong enough to withstand further interest-rate hike from the Federal Reserve led the S&P 500 Index to a late month rally. With still strong reports of corporate earnings coming out, emphasis will be placed on inflation figures, which have been at low end of the comfort zone, and the possibility of future rate hikes before the year is done. While growth in GDP remains strong, a softening real-estate market is a concern. The S&P 500 ended the second quarter of 2006 down just 2%. Fears of inflationary pressures building up in the Eurozone, accompanied by increases in global interest rates pushed the S&P Euro Index down over 12% at a point in time this quarter. The current policy of tightening by the Euro Central bank has raised the possibility of over-shooting and creating a global slowdown in consumer demand. Accompanied by a pullback in prices of metals and energy, this quarter proved difficult to digest for most investors. On a positive note, the Eurozone market ended the month with a 7% rally and finished down 5% for the quarter. 
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UPDATES
GlobeFund named the Van Arbor CDN Advantage Fund a Five Star Fund, the highest ranking, while Fundata.com has recently given the Van Arbor CDN Advantage Fund an "A" grade. Fundlibrary and Fundata also ranked the Van Arbor Canadian Advantage Fund #1 performing fund in the pure equity class out of 292 funds in the two years ending May 31st, 2006.
CANADIAN ADVANTAGE FUND
The Van Arbor Canadian Advantage Fund retracted 3.06% to close at $16.62, while the S&P TSX Equity Index fell 1.15% to close at $14.15. During the highly volatile month, the S&P TSX pulled back over 8% and then aggressively advanced in excess of 6% to close the month slightly down. The late month rally suggested a swelling of optimism in the eyes of investors, as the comeback in equities was also accompanied by advances in energy and metal prices. While most industry subgroups in the TSX ended the month in red, least affected were energy holdings and consumer stocks.
The top fund performers were energy stocks, which as a group ended the month up 1.2%. As inflation fears remain, further tightening by the Bank of Canada may be insight. Higher interest rates erode bank profits as consumer and corporate lending slows. However, despite their bleak outlook, bank stocks still offer some of the highest yields and as a result have historically been the defensive plays for investors. During the month the following trades were made to the Fund. Holdings of Loblaws, Shell Canada, Power Financial and IGM Financial were sold and replaced with Ensign Energy (ESI:TSX), FirstService Corp (FSV:TSX), CCL Industries (CCL/B:TSX) and TransAlta Comp (TA:TSX).
Fund Performance Summary (Benchmark is S&P TSX Index)
US ADVANTAGE FUND
The Van Arbor US Advantage Fund declined 1.38% to close at $11.36, while the S&P 500 Index remained flat and closed at $11.60. Similar to the abnormally high volatility seen in the Canadian market, the S&P 500 retracted over 5% during the first half of the month only to rebound in the last week of the month to break even. For the 17th consecutive time, the Fed policy makers elected to raise benchmark interest rates. US stocks had the biggest rally since 2003 after the Federal Reserve suggested that economic growth is slowing, giving the central bank some leeway to pause after raising interest rates the past two year. The central bank's comments also eased investors concern that higher borrowing costs will curb global demand for commodities.
The top performing stocks for the month were energy related holdings, as shares of Exxon Mobil (XOM:NYSE), Apache Corp (APA:NYSE) and MDU Resources (MDU:NYSE) advanced 0.72%, 5.19% and 3.18% for the month. Shares of financials also made a modest advance this past month, led by holdings of Golden West Financial (GDW:NYSE), and Wells Fargo (WFC:NYSE), which were up 1.50% and 1.07% respectfully. The following portfolio trades took place this past month. Holdings of Brown & Brown, Dentsply, Brown-Forman and Equitable Resources were sold and replaced by Old Republic (ORI:NYSE), Altria Group (MO:NYSE), PepsiCo (PEP:NYSE) and Entergy (ETR:NYSE).
Fund Performance Summary (Benchmark is S&P 500 Index)
EURO ADVANTAGE FUND
After a very strong run, since its August 2005 inception, the Van Arbor Euro Advantage Fund declined 0.62% for the month to close at $10.70, while the S&P Euro Index ended up 1.04% to close at $10.78 for month of June. Concerns regarding inflationary pressures translating into higher interest rates and possible slowdown in global demand, took a toll on the Euro equity markets earlier in the month as the Index lost about 7% of its value. The loss was immediately followed by even sharper gains as the Index rebounded over 7% to close the month in positive territory. While companies operating in the construction space were heavily hit this past month, there were exceptions. Shares of Vinci (DG FP), the world's biggest construction company soared 12% for the month after a proposed bid from Veolia Environment, the world's biggest water company. Despite the collapse of the bid, a few days after, shares of Vinci still ended the month trading near its 52 week high.
The best performing sector in the Fund was once again the energy sector, which advanced on average around 1%. The portfolio was slightly affected by a pullback in the Euro, which ended the month down 1.20%. There were no portfolio trades to report.
Fund Performance Summary (Benchmark is S&P Euro Index)
Van Arbor Asset Management is an independent Asset Management company dedicated to creating wealth using a disciplined, proprietary investment strategy with an emphasis on preserving capital while generating superior long-term returns.
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