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February 2008 Newsletter
Friday, February 01, 2008
MARKETS UPDATE
The New Year got off to a rough start as equity markets across the globe gave into fear and uncertainty. Markets sold off in tandem as investor sentiment turned sour across most equity sectors. Adding to the tumultuous start was the type of volatility that we have not seen in years. Canadian and European markets saw some of the sharpest up and down moves in many years, while the US was tempered by the Federal Reserve cutting interest rates twice within a one week period by a total amount of 1.25%. This roller coaster month saw our Canadian Fund give up its gains from the prior month. The Euro Fund also saw equity prices drop sharply as the European market was the worst performing equity market in the developed world. The US Fund saw modest loses in comparison and has been outperforming the market for the last six months.
Market volatility, uncertainty and investor sentiment helped push two of our funds to their worst monthly performance on record. This was disconcerting as we saw some great value companies suffer huge setbacks in returns strictly based on negative sentiment as opposed to any real information. January was a relatively quiet period for information on company's earnings and guidance and thus we saw nothing fundamentally change that warranted such negative attention on an individual basis. Even though emotion seems to be driving the market in the short term, we remain principled in our long term value investment philosophy.
Over the last year we have witnessed the outperformance of growth stocks relative to value stocks. It began early in the US market last year and has really picked up steam in the Canadian and Euro market in the last six months. Commodities, resource, gold and cyclical growth stocks have performed remarkably well. History has shown repeatedly that chasing growth usually ends poorly, while investing in fundamentally sound companies with consistent track records and less expensive valuations outperforms in the long run. We firmly believe that the key to survive this market volatility is to stick to the investing principles of buying undervalued securities that have proven to succeed over the long term rather than getting caught up in short term thinking. We expect that the short term will remain volatile; however, we are optimistic about the opportunities and prospects that 2008 will bring for all our investors once markets begin to recover.
CANADIAN ADVANTAGE FUND
The Canadian Advantage Fund ended the month down 13.0% while the S&P TSX Index fell 5.9%. A large part of the fund's underperformance was attributed to our non-exposure to gold, commodity and cyclical growth stocks that performed remarkably well last month in a very volatile market. The materials sector finished the month up 10% while the rest of the sectors in the TSX Index fell substantially. Our investment strategy tends to stay away from high growth cyclical sectors, while focusing on companies with proven growth and attractive value based attributes. Value stocks underperformed the market considerably last month and our portfolio suffered as a result. Great companies with good valuations like Petro-Canada, Telus, and Power Corp saw double digit losses last month. On an individual basis we saw a handful of names that had great performances in December pull back significantly in January. Westjet is one example, falling 18% after reporting record load factors at the beginning of the month. Concerns that high oil prices were going to hamper earnings turned out to be incorrect as Westjet's CEO announced on the last day of the month that the company is on track to meet or beat expectations in February. Going into February we have two thirds of the portfolio reporting fourth quarter earnings, which we expect will put much of the portfolio back on track. Clearly, sentiment and emotion are driving equity prices and a lack of information last month has added to the selling pressure. We have not seen anything fundamentally change with the companies we own and look forward to seeing earnings and guidance meet or beat expectations as they successfully have done so in the past.
US ADVANTAGE FUND
The US Advantage Fund fell 5.4% last month while the S&P 500 Index was down 6.1%. We saw a fairly consistent outperformance all month as investors began to shun riskier equities for quality names. We saw strength out of health care, consumer staples and large multinationals benefiting from a weak US dollar. Financials outperformed the market last month; however, we do not currently own any as it is a bit too early for them to be justifiably added. The current US portfolio is very well positioned for any economic environment as it offers some of the most attractive valuations as well as a diversified selection of equities that offer great prospects regardless of the direction of the US economy. The fact that the Federal Reserve has aggressively cut rates and the US dollar has stabilized, should lead to the US portfolio having a great year as value begins to outperform growth stocks. On the dollar front, much of the cuts in interest rates have been priced in and it is only a matter of time before other nations cut their interest rates as well, namely Canada and Europe. This being said, it may allow the US dollar to finally stabilize and possibly see some relative gains this year. 
EURO ADVANTAGE FUND
The Euro Advantage Fund ended the month down 14.7% while the S&P Euro Index fell 10.5%. The Euro equity market has been one of the worst performing markets in the developed world and continues to trade on uncertainty. The German DAX Index fell 15.1%, while the French CAC Index fell 13.3%. On a sector basis the month saw the financial, industrial and consumer discretionary sectors fall 15.8%, 16.4% and 17.4%, respectively. Equity prices have fallen sharply as investor sentiment remains negative with concerns of a slowing US economy, rising Euro Zone inflation and the Euro at record levels versus the US dollar. The Euro area has been in a bit of a conundrum as the Fed has aggressively cut interest rates, while the European Central Bank threatens to raise rates in order to fight inflation. The economic picture has been fairly positive with domestic demand and industrial production weathering the effects of the rise of the Euro. The main drag on equity prices has been the market anticipating slowing demand from the US coupled with higher interest rates. A key interest rate meeting in February will help shed light on the direction of the rates in question. Either the ECB is correct in that the Euro Zone will continue to grow and there is no need to cut rates or equity markets are correct that the US slowdown will effect growth. Further compounding the difficulty is a lack of information from individual companies before semi-annual earnings releases over the next few months. 
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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