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October 2006 Newsletter
Sunday, October 01, 2006
MARKETS AT A GLANCE: QUARTERLY UPDATE
The Canadian equity markets rebounded since their mid year lows, however investors remain cautious amid falling oil prices and a slowing economy south of the border. Notwithstanding, Statistics Canada reported that our economy, the world's eighth-largest, expanded 0.2% in July, led by mining, wholesaling and financial services. Consumer spending and robust foreign demand for commodities boosted growth, while strong currency and slower US growth were the culprits for the stall in manufacturing and factory exports.
Belief that a downturn in the housing market will have a major impact on the wider economy seems to be a consensus amongst economists who are expecting a slower GDP growth and rate cuts to start in early 2007. The strong performance of the stock market has reduced worries of a hard landing and focus has shifted towards consumer spending and the retail sector. The S&P 500 Index hit a five-and-a-half year high this past week.
Eurozone equity markets approached five year highs on speculation earnings will grow and the region will see more mergers and acquisition activity. Furthermore, the combination of healthy earnings and attractive valuations may fuel equities higher. With inflationary pressures taking a back seat, the focus of attention is on consumer demand in North America and the spill-over affect to the Eurozone. 
CANADIAN ADVANTAGE FUND
The Van Arbor Canadian Advantage Fund retracted 1.91% for the month of September, while the benchmark equity index, S&P TSX, lost 1.93% for the same period. While the Fund lags the Index over the short term intervals, we believe that the value metrics employed by the equity selection methodology will provide superior long term performance and portfolio risk reduction. Year to date, the Fund is slightly trailing the S&P TSX Index, however the underperformance is solemnly due to the Fund being underweight materials, more specifically gold exploration and production companies. With three quarters of the year out of the way, the year to date performance of the Index has been largely influenced by energy, materials, and financials which as a group currently account for almost 75% of the total weight in the Index.
This year's slowdown in consumer demand combined with mild weather and unfavorable demand/supply fundamentals prompted the price of oil to retreat below $65 a barrel, consequently bringing down the share price of companies with any kind of business exposure to oil or gas. The S&P TSX Energy Index ended down 1.5% year to date. Similarly the pullback in precious metals continued to contribute to the recent lackluster performance of the S&P TSX Materials Index which ended the month down 9%. Over the month the Fund benefited from holdings of financials, which as a group appreciated 3.5%. Shares of Kingsway Financial (KFS:TSX), ended the month up 12%. The energy group did not fare as well and shed 7% for the month. The slowdown in oilfield services activity was pronounced by shares of Ensign Energy Services (ESI:TSX), which ended the month down over 10%. There were no portfolio trades for the month.
Fund Performance Summary (Benchmark is S&P TSX Index)
US ADVANTAGE FUND
The Van Arbor US Advantage Fund ended the month up 1.45% while the S&P 500 Index finished the month up 2.46%. The US Fund's excess quarterly performance of 2.19% was accompanied by not a single month of negative returns. While growth in prices of consumer goods and services, as tracked by the Consumer Price Index, have not shown any signs of staying put, there are also numerous signs pointing to slower economic growth. While the third quarter year-over-year GDP growth fell from 3.7% to 3.5%, the annualized second quarter growth dropped to 2.6% from 5.6% in the first quarter. Accompanying these figures is a sharp pullback in residential fixed investments and business spending. The Federal Reserve policy makers decision to end interest rate hikes in June proved to be the right one, however the visible signs of the economy cooling prompt the question of policy timing.
Top performers were consumer oriented holdings, which ended the month up 3.67%. Target Corp (TGT:NYSE), the second-largest US discount store chain, expected monthly sales growth to rise 5% for September. The retailer ended the month up 13% on favorable reviews by analysts. Shares of Old Republic Intl, an insurance holding company, (ORI:NYSE) ended the month up 6%. The insurance industry has shown continued favorable and improved operating performance in the first half of 2006. Due to the seasonality of US windstorm activity, most of which takes place in the third quarter, full year performance could post strong underwriting results if weather patters continue to be mild. There were no portfolio trades to report.
Fund Performance Summary (Benchmark is S&P 500 Index)
EURO ADVANTAGE FUND
The Van Arbor Euro Advantage Fund concluded the month up 2.76% while the S&P Euro Index finished the month up 2.69%. The Fund has captured a 13.39% return since the beginning of 2006. The 20% drop in crude since mid July pushed the inflation rate in the euro area below the bank's ceiling in September for the first time since January 2005. The decline leaves companies and consumers with more money to spend, however the robust expansion has led forecasters to fear companies raising prices.
Most economists have predicted the European Central Bank will raise the benchmark refinancing rate another 50 basis points before the year end on fears of looming inflationary pressures as we enter the holiday shopping season. Aided by Grupo Catalina's (GCO:SM) well received financial results which drove the stock up 25% for the month, banks and insurance related companies fared best in the portfolio and as a group ended the month up 7%. Consumer oriented holdings were also up and finished the month up 4.20%. The Euro appreciated 20 basis points during the month against the Canadian dollar. There were no portfolio trades to report this month.
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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