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July 2009 Newsletter

July 1st, 2009

MARKETS AT A GLANCE: QUARTERLY UPDATE

A little bit of confidence went a long way over the last three months, helping markets around the World awaken from their Armageddon levels. The speed and broadness of the rally was an indication of how deeply oversold and undervalued stocks have become. Since our last quarterly commentary, the Van Arbor Funds have enjoyed their best quarter since inception. The Canadian Fund rose 58%, while the World Fund ended up 23%. Being value managers, it is always nice to see the market return some value to excellent companies that were brought down to unwarranted levels. Even as we write, there remain outstanding value opportunities leftover from last year’s financial panic. In many cases, companies are trading below their net asset value. The one difference that we are finding over the last few months is that selectivity is of more importance going forward, as not all sectors offer the same prospects for a recovery in earnings.

This summer promises to be an enlightening time, as we get the opportunity to look under the hood, with companies reporting second quarter earnings. Outlook and some indication of demand will be the key things we are looking for. From a cyclical perceptive, it appears that the severe drop in demand and inventory drawdown over the last year is beginning to lead to a restocking of products and a revival from postponed purchases. Fiscal stimulus coupled with a much rosier growth outlook from China, should help markets continue their march towards a more normal valuation and subsequent higher market level. Even though markets have rallied off their recent bottom, the TSX for example would still need to rise nearly 50% to get to its 2008 all time high.

Canadian Economic Update

The Canadian economy remains in a rut, as the US recession continues to hamper the manufacturing, forestry, and auto sector. The few rays of light have been coming from the commodity and energy sectors, who are seeing a revival in prices as Asian economies are recovering much faster than expected. We expect that the current leadership from the resource sector will help benefit the broader economy, especially relative to the US economy, which may take longer to recover. Canada is also starting to get some positive international media coverage, with our financial system receiving kudos for its risk management, leading to greater investor confidence from aboard.

World Economic Update

The World economy is showing signs of bottoming after its worst global recession since World War II. The focus has now shifted from how deep the recession will be, to what the recovery will look like. Our main focus remains on a greater economic revival out of high savings rate countries in Asia and emerging markets. At the same time we see a recovery, albeit a slower one, in areas like the US and Europe, which have to spend some time rebuilding balance sheets through a higher savings rate. These larger themes are playing out in the economic data with countries like China showing signs of expansion, while the US sees signs of contraction ending. Thus, the investment implications over the next couple of years favors selectively before a broader recovery takes hold.

CANADIAN ADVANTAGE FUND

The Canadian Fund finished the quarter strong, with a 2.7% return in June, while the TSX index ended almost exactly flat. The second quarter of 2009 was indeed our best quarter to date, as leadership emerged from the material, energy, and industrial sectors, all of which has been where we have been establishing positions over the last few months. Value still remains in this market, as asset values, valuations, and sentiment remains well below normal levels. We have had to trim some of our big winners over the last couple of months as they returned to fairer values; however, we have found some very selective new opportunities as replacements that offer great value prospects over the medium term. Last month was a fairly balanced month for leadership, as investors digest the recent market rally and look out to the economic recovery which appears to be developing.

WORLD ADVANTAGE FUND

The World Fund also finished the quarter strong, rising 1.4% in June, while the MSCI World Index ($C) rose 5.4%, helped in part by the US dollar rising 4.8% versus the Loonie. Markets were mixed, as investors await a better indication of the shape and speed of economic recovery that is being led by a return in confidence. The Fund itself is fairly balanced with regards to international exposure. The Fund is currently invested equally in the US and Europe, with some select investments in Australia and Japan. Direct and indirect infrastructure companies remain our core holdings as economies around the globe are spending around 2% of GDP targeting infrastructure. Material and oil service stocks are also favored as their value coupled with global prospects has improved over the last 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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